THE   PASSING   OF   THE 
GOLD   RESERVE 

A  STUDY 
IN  NATIONAL  FINANCE  AND  CURRENCY 


BY 

GEORGE  KOEHLER,  LL.B. 

Until  Lately  Connected  with  the  United  State*  Treasury  Department, 

Washington,  D.  C.     Author  of  "Importers  First  Aid  in  American 

Tariff  and  Customs  Procedure"  and  Director  of  "Importers 

First  Aid  Service,"  Washington  and  New  York 


1920 


•**    •    •    •'••••«''>'. 
.  .*;. :    :;•  •  •:>,>  ;>, 
••*•••••»•   *>»»>. 


PUBLISHED  BY 

IMPORTERS  FIRST  AID  SERVICE 
1423  NEW  YORK  AVENUE  N.  W. 

WASHINGTON,  D.  C. 


,\ 


COPYRIGHT,  1920,  BY 

IMPORTERS  FIRST  AID  SERVICE 


AU  rights  reserved,  including 
translation 


Made  in  U.   S.  A. 


BALTIMORE.   MD..   U.   S.    A. 


PREFACE 

It  is  now  spring  of  the  year  1920.  A  year  and 
a  half  has  elapsed  since  the  close  of  hostilities  of  the 
World  War.  The  demobilization  of  the  armies 
engaged  in  that  conflict  has  been  practically  com- 
pleted and  a  general  resumption  of  the  civil  and 
industrial  activities  of  peace  should  be  close  at 
hand. 

In  our  own  country,  the  United  States  of  North 
America,  we  find  that  rapid  strides  are  made  in  that 
direction ;  but  that  the  high  prices  of  war-time  are 
still  with  us  and  that  a  gradual  betterment  of  those 
conditions  is  hoped  for. 

As  to  European  countries  the  situation  does  not 
appear  quite  so  promising.  Having  suffered  con- 
siderably financially,  their  resources  and  credit  are 
greatly  exhausted  and  their  progress  towards  finan- 
cial and  industrial  recuperation  is  correspondingly 
impaired. 

Thus  we  learn  from  the  daily  Press  that  there  is  a 
great  demoralization  of  the  foreign  exchanges ;  that 
the  British  Pound  Sterling  has  been  quoted  at 
$3.25  or  less  at  New  York,  as  against  its  par  value  of 
$4.86;  that  the  French  franc  has  been  quoted  at 
$.10  as  against  its  par  value  of  $.193 ;  that  the  Ger- 
man mark  has  been  quoted  at  $.01  as  against  a  pre- 
war value  of  $.238  and  that  the  foreign  exchanges 
of  other  countries  are  likewise  greatly  depressed. 

Through  it  all  we  hear  that  long  established  Fi- 
nancial Systems  of  European  countries  are  break- 
ing down ;  that  enormous  quantities  of  legal  tender 
paper  currency  have  been  issued ;  that  there  is  in- 
sufficient gold  available  to  support  these  issues  on 
a  pre-war  basis;  that  available  gold  supplies  are 

442G07 


iv  PREFACE 

being  hoarded;  that  credits  abroad  are  exhausted; 
that  commerce  with  foreign  countries  is  becoming 
more  difficult  and  that  for  want  of  a  sound  and 
stable  currency  at  home,  domestic  commerce  and 
industry,  so  necessary  to  an  early  recuperation  of 
the  nations,  are  impeded. 

Much  is  said  about  inflation  of  the  currency ;  we 
are  admonished  to  work  and  save ;  various  schemes 
for  the  establishment  of  international  currency  and 
credits  are  brought  forward,  based  upon  a  policy 
of  borrowing  from  others,  while  no  very  determined 
effort  is  made  to  first  build  up  at  home.  The  all  and 
overbearing  importance  of  obtaining  and  holding 
gold  as  a  reserve  against  an  over-expanded  paper 
currency  is  constantly  before  us.  Already  we  hear 
it  openly  discussed  abroad  whether  after  all  the 
maintenance  of  the  gold  reserve  is  not  too  great  a 
task  for  the  nations  to  bear,  while  serious  thought 
is  given  to  finding  a  solution  of  that  great  problem. 

We  too  may  therefore  well  wonder  as  to  the  all 
absorbing  necessity  of  maintaining  the  Gold  Re- 
serve Currency  System  of  the  present  and  whether 
after  all  it  has  not  in  reality  outlived  its  day  and 
generation  and  in  the  ever  onward  moving  course 
of  events,  it  is  not  about  ready  to  give  way  to  a  more 
modern  and  more  enlightened  system  that  will  best 
serve  mankind. 

In  the  study  of  the  following  pages  of  this  book 
let  us  therefore  give  serious  thought  to  this  prob- 
lem, so  that  we  may  each  and  all  more  fully  under- 
stand its  importance  and  to  be  the  better  able  to 
judge  as  to  the  soundness  of  the  conclusions 
reached. 

GEORGE  KOEHLER. 
Washington,  D.  C. 

May,  1920. 


TABLE  OF  CONTENTS 

CHAPTER  PAGE 

I.  Financing  the   Government 1 

II.  Financing  the   Public 15 

III.  Financing  the  Banks 19 

IV.  Emergency  Currency 24 

V.  The  Gold  Reserve 46 

VI.  Balance  of  Trade 49 

VII.  The  Gold  Standard 53 

VIII.  The  Tyranny  of  the  Gold  Reserve 55 

IX.  Equalizing  Foreign  Exchange 64 

X.  Financing  the  War 69 

XI.  Inflation  of  the  Currency 73 

XII.  Deflation  of  the  Currency  and  the  Passing  of  the 

Gold  Reserve                                                          .  76 


OAUFOJ-- 


THE  PASSING  OF  THE  GOLD  RESERVE 


CHAPTER  I 

FINANCING  THE  GOVERNMENT 

It  requires  no  very  great  stretch  of  the  imagina- 
tion to  contemplate,  that  a  country,  rich  in  natural 
resources,  favored  with  fertile  fields,  inhabited  by 
an  intelligent  and  industrious  people,  eager  and 
willing  to  till  the  soil  to  gather  therefrom  suste- 
nance for  man  and  beast ;  a  country  rich  in  mineral 
wealth,  endowed  with  bounteous  deposits  of  coal 
and  oil,  the  ores  of  lead,  iron,  copper  and  zinc,  and 
having  an  abundant  supply  of  forests,  furnishing 
materials  affording  warmth,  shelter  and  other  com- 
forts of  life ;  but  having  no  deposits  of  gold  or  silver, 
can,  or  should  be  able  to  live  unto  itself  and  grow 
strong  and  prosperous. 

The  tillers  of  the  soil,  as  they  dispose  of  the  sur- 
plus products  of  their  fields,  should  be  able  to  accu- 
mulate savings  manifested  in  the  shape  of  improve- 
ments to  their  lands;  modern  buildings;  efficient 
farm  implements  and  machinery,  live  stock,  and 
other  evidences  of  industry  and  wealth. 

The  industrial  workers  of  the  Nation,  by  their 
daily  toil,  should  also  be  able  to  accumulate  savings, 
invested  in  homes  and  other  evidences  of  comfort 
and  thrift.  The  same  should  be  true  as  to  the  com- 
mercial community  engaged  in  facilitating  the  ex- 
change of  commodities  between  those  who  produce 
and  those  who  consume. 


THE  GOLD  KESERVE 

Thus  there  should  be  an  opportunity  to  develop 
a  populous  mlodern  community,  or  nation,  rich  in 
agriculture  and  industry.  The  past  teaches  us, 
however,  that  such  developments  have  been  slow 
and  uncertain,  much  of  the  difficulty  having  arisen 
through  the  methods  employed  in  effecting  the  ex- 
change of  commodities  between  those  who  produce 
and  those  who  consume,  and  also  in  finding  some 
method  of  compensating  those  engaged  in  the  inter- 
mediate activities  of  commerce. 

Economists  tell  us  that  the  primitive  method  of 
effecting  an  exchange  was  by  the  direct  barter  of 
one  commodity  for  another  and  that  by  various  long 
and  tedious  stages  a  system  of  exchange  was  finally 
developed,  whereby  all  commodities  and  labor  were 
measured  in  terms  of  some  fixed  standard  called 
money. 

By  virtue  of  certain  qualities  of  inherent  beauty, 
serviceability,  etc.,  discovered  in  the  precious 
metals,  gold  and  silver,  those  metals  at  an  early  day 
came  to  be  utilized  extensively  for  the  purpose  of 
money,  the  value  of  which  was  measured  according 
to  certain  fixed  standards  of  weight  and  purity. 

As  the  fixing  of  this  standard  for  the  measure- 
ment of  values  was  a  matter  which  vitality  affected 
the  welfare  of  all  members  of  the  community  as  well 
as  the  fortunes  of  the  nation  itself,  it  soon  became 
the  prerogative  of  established  Government  to 
"  coin  money  and  to  regulate  the  value  thereof." 
Thus  it  is  provided  by  Section  VIII  of  Article  I  of 
the  Constitution  of  the  United  States  that: 

"  The  Congress  shall  have  Power  ....  to  Coin  Money,  regu- 
late the  value  thereof  and  of  foreign  coin,  and  fix  the  Standards 
of  Weights  and  Measures." 

So  all  governments  have  at  various  times  utilized 
either  one,  or  the  other,  or  both  of  these  precious 


FINANCING  THE  GOVERNMENT        3 

metals  for  the  coinage  of  money.  During  early 
times  silver  was  almost  exclusively  used  as  the 
standard,  then  both  gold  and  silver  at  varying 
ratios  of  value,  as  compared  with  each  other,  until 
at  the  present  day  gold  has  become  practically  the 
sole  standard  of  value,  silver  being  used  chiefly  for 
purposes  of  minor  coinage. 

As  heretofore  stated  the  modern  state,  or  nation, 
which  we  have  here  under  contemplation,  and  in  the 
progress  and  development  of  which  we  are  for  the 
present  interested,  has  no  deposits  of  gold  or  silver. 
It  is  therefore  in  no  position  to  authorize  the  coin- 
age of  gold  and  silver  by  legislative  enactment,  to 
provide  money  for  active  circulation.  The  nation, 
like  all  vigorous  and  progressive  countries,  we  will 
assume,  has  an  established  and  stable  form  of  Gov- 
ernment in  which  are  vested  legislative,  executive 
and  judicial  powers.  As  the  country  is  living  with- 
in itself  no  revenue  can  be  derived  from  imports, 
as  no  goods  are  imported  from  other  countries. 
Its  principal  source  of  revenue  would  therefore 
most  likely  be  that  derived  from  internal  taxation 
on  spirituous  liquors,  manufactured  tobacco,  cigars, 
etc.,  together  with  taxation  on  incomes,  excess 
profits,  and  the  like. 

Experience  has  shown  that  taxes  on  incomes  and 
excess  profits  where  imposed  are  not  paid  into  the 
public  Treasury  day  by  day,  like  duties  on  imports, 
or  the  ordinary  internal  revenue  stamp  taxes ;  but 
are  generally  paid  at  certain  definite  periods  an- 
nually or  semi-annually,  or  near  the  close  of  the 
fiscal  year.  It  may  therefore  happen  (and  in  fact 
it  has  so  happened)  that  a  Government  depending 
upon  this  source  of  revenue  for  its  existence  may 
at  times  find  itself  in  urgent  need  of  funds  to  meet 
its  daily  running  expenses,  the  payment  of  which 


4   PASSING  OF  THE  GOLD  BESERVE 

cannot  be  deferred  to  await  the  collection  of  the 
taxes  on  incomes.  Where  such  conditions  exist  at 
the  present  day  it  is  therefore  the  policy  of  es- 
tablished Governments  to  borrow  temporarily 
money  on  the  credit  of  the  Government,  from  bank- 
ing institutions,  either  private  or  semi-private,  on 
what  are  generally  called  "  Treasury  Bills  "  or 
"  Short  Term  Notes,"  or  Treasury  Certificates  of 
Indebtedness. " 

Thus  in  England  it  is  one  of  the  functions  of  the 
Bank  of  England : 

"To  make  advances  to  the  Treasury  in  the  shape  of  ' defi- 
ciency advances '  when  the  Government  balances  are  too  low  to 
admit  of  the  payment  of  the  quarterly  interest  on  the  British 
debt  without  replenishment,  or  against  '  ways  and  means ' 
advances  at  times  when  the  revenue  is  coming  in  more  slowly 
than  government  expenditure  is  proceeding." 

A  like  practice  has  been  recently  resorted  to 
by  the  United  States  Treasury,  through  the  issue 
of  so-called  "  Treasury  Certificates  of  Indebted- 
ness "  or  "  Short  Term  Notes  "  which  have  been 
offered  for  sale  to  banking  institutions  at  current 
rates  of  interest  and  made  redeemable  within  a 
short  period  (usually  90  days)  after  the  date  of 
issue.  Where  such  "  Treasury  Bills  "  or  "  Short 
Term  Notes  "  are  redeemable  within  a  short  time 
after  issue  and  are  secured  by  the  credit  of  the  Gov- 
ernment with  the  definite  assurance  that  taxes  are 
in  course  of  collection  sufficient  to  take  them  up  at 
maturity,  they  are  generally  considered,  by  the 
banking  community,  to  be  gilt  edge  securities,  are 
freely  sought  after  as  liquid  investments,  and  are 
usually  floated  at  low  rates  of  interest  favorable  to 
the  Government. 

Having  thus  far  made  no  provision  for  the  estab- 
lishment of  banking  institutions,  either  govern- 
mental or  private,  our  modern  country  cannot  bor- 


FINANCING  THE  GOVERNMENT        5 

row  from  such  institutions  in  order  to  obtain  ready 
funds  to  defray  its  necessary  daily  running  ex- 
penses. It  is  therefore  obvious  that  other  methods 
of  financing  the  government  must  be  resorted  to. 
In  the  past,  under  like  circumstances,  it  has  been 
the  policy  of  some  governments,  to  issue  paper 
money,  making  the  same  legal  tender  for  the  pay- 
ment of  debts,  both  public  and  private.  Such  legal 
tender  currency  has  generally  been  issued  in  the 
course  of  some  great  public  emergency,  thus  during 
the  American  Civil  War  1861-1865  Legal  Tender 
Notes  were  provided  by : 

"  The  Act  of  February  25,  1862  (12  Stat.  345),  which  author- 
ized the  issue  of  $150,000,000  United  States  Notes,  not  bearing 
interest,  payable  to  bearer  at  the  Treasury  of  the  United  States, 
and  of  such  denominations,  not  less  than  five  dollars,  as  the 
Secretary  of  the  Treasury  might  deem  expedient,  $50,000,000 
to  be  applied  to  the  redemption  of  demand  notes  authorized  by 
the  Act  of  July  17,  1861;  these  notes  to  be  a  legal  tender  in 
payment  of  all  debts,  public  and  private,  within  the  United 
States,  except  duties  on  imports  and  interest  on  the  public  debt, 
and  to  be  exchangeable  for  six  per  cent  United  States  bonds. 
The  Act  of  July  11,  1862  (12  Stat.  532),  authorized  an  addi- 
tional issue  of  $150,000,000  of  such  denominations  as  the  Sec- 
retary of  the  Treasury  might  deem  expedient,  but  no  such  note 
should  be  for  a  fractional  part  of  a  dollar,  and  not  more  than 
$35,000,000  of  a  lower  denomination  than  five  dollars;  these 
notes  to  be  legal  tender  as  before  authorized.  The  act  of  March 
3,  1863  (12  Stat.  710),  authorized  an  additional  issue  of  $150,- 
000,000  of  such  denominations,  not  less  than  one  dollar,  as  the 
Secretary  of  the  Treasury  might  prescribe;  which  notes  were 
made  a  legal  tender  as  before  authorized.  The  same  act  limited 
the  time  in  which  the  Treasury  notes  might  be  exchanged  for 
United  States  bonds  to  July  1,  1863."  (Report  of  the  Secretary 
of  the  Treasury,  1919,  p.  582.) 

It  will  be  observed  that  these  notes  were  "  not  to 
be  accepted  by  the  Government  in  payment  of 
duties  on  imports  ";  but  were  to  be  exchangeable 
for  United  States  six  per  cent  bonds  within  a  speci- 
fied period.  Although  but  $450,000,000  of  such 
notes  were  issued  they  soon  depreciated  in  value 


6   PASSING  OF  THE  GOLD  RESERVE 

as  compared  with  gold,  the  latter  going  to  a  con- 
siderable premium  during  the  period  of  the  war 
and  afterwards,  owing  no  doubt  to  the  fact  that 
these  notes  were  of  but  limited  legal  tender  value 
and  were  convertible  into  United  States  bonds,  the 
market  values  of  which  were  also  fluctuating  ac- 
cording to  the  fortunes  of  war. 

By  reference  to  the  annual  report  of  the  Secre- 
tary of  the  Treasury  for  the  fiscal  year  ended  June 
30,  1919,  pp.  616  and  627,  it  will  be  observed  that 
during  the  years  1791-1919,  both  inclusive,  the 
receipts  from  Customs,  Internal  Revenue,  and 
other  ordinary  receipts  and  disbursements  of  the 
United  States  Government  were  as  follows :  (  There 
is  also  shown  in  a  separate  column  the  "  Premium 
on  Gold  "  where  one  existed  for  that  period). 

It  will  thus  be  noted  that  during  the  four  active 
years  of  the  Civil  War  (1862-1865  inclusive)  the 
total  ordinary  disbursements  were  greatly  in  excess 
of  the  total  ordinary  receipts  of  the  Government. 
To  tide  over  this  deficiency  in  receipts  efforts  were 
at  first  made  to  replenish  the  United  States  Treas- 
ury by  the  issue  of  legal  tender  notes  to  the  amount 
of  $450,000,000  as  stated.  Thereafter  to  make  up 
any  further  deficit  in  the  receipts  bonds  bearing 
varying  rates  of  interest  were  issued  by  the  Na- 
tional Government. 

It  will  also  be  noted  that  during  the  years  1866 
to  1879  inclusive,  the  ordinary  receipts  were  in 
excess  of  the  ordinary  disbursements  for  the  year 
and  that  notwithstanding  such  excess  in  receipts, 
gold  remained  at  a  premium  until  1878  when  by 

"  The  Act  of  January  14,  1875  (18  Stat.  296),  the  Secretary 
of  the  Treasury  was  authorized  to  use  any  surplus  revenues  from 
time  to  time  in  the  Treasury  not  otherwise  appropriated,  and  to 
issue,  sell,  dispose  of,  at  not  less  than  par  in  coin,  either  of  the 
descriptions  of  bonds  of  the  United  States  described  in  the  Act 


FINANCING  THE  GOVERNMENT 


TABLE   I.— ORDINARY   RECEIPTS   AND   DISBURSEMENTS   OF 

THE   UNITED    STATES 
RECAPITULATION  OF  RECEIPTS  BY  FISCAL  YEABS 


Year. 

Customs. 

Internal 
revenue. 

Ordinary 
receipts. 

Ordinary 
disbursements. 

Pre- 
mium 
on 

gold. 

1791  

$4,399,478.09 
3,443,070.85 

$208,942.81 

$4,409,961.19 
3,669,960  31 





1793 

4,255,306.56 

337,705.70 

4,652,923.14 

4,801,065.28 

274,089.62 

6,431,904.87 

1795                .... 

5  588,461.26 

337,755.36 

6,119,334.59 

1798     

6,567,987.94 

475,289.60 

8,420,829.65 

1707              

7,549,049.65 

576,491.45 

8,688,780.99 

1793     

7,106,061.98 

644,357.95 

7,979,170.80 

1799            

6,610,449.81 

779,136.44 

7,646,813.31 

1800     

9,080,932.73 

809,396.55 

10,848,749  10 

1801            

10,760,778.93 

1,048,033.43 

12,945,465.95 

1802 

12  438,235  74 

621,898.89 

14,996,798.95 

1803     

10,479,417.61 

215,179.69 

11,064,097.63 

1804  

11,008,565.33 

50,941.29 

11,826,307.38 

1806       

12,936,487.04 

21,747.15 

13,560,693.20 

1806  

14,667,61)8.17 

20,101.45 

15,559,931.07 

1807            

15,845,521.61 

13,051.40 

16,398,019.26 

1808        

16,363,550.58 

8,190.23 

17,060,661.93 

1809  

7,257,506.62 

4,034.29 

7,773,478.12 

1810 

8,688,309.31 

7,430.63 

9,384,214.28 

1811          

13,313,222.78 

2,295.95 

14,422,634.09 

1812 

8  958,777.63 

4,903.06 

9,801,132.76 

1813  

13,224,623.25 

4,756.04 

14,340,709.95 

1814  

6,998  772.08 

1,662,984.82 

11,181  710.96 

1816  

7,282,942.22 

4,678,059.07 

15,708,468.56 

1816 

36  306  874  88 

5,124,708.31 

47,746,650.82 

1817  

26,283,348.49 

2,678,100.77 

33,366,868.88 

1818                .... 

17  176  385.00 

955,270.29 

21,585,583.66 

20,283,608.76 

229,593.63 

24,603,874.37 

1820 

15,005  612.15 

106,260.53 

17,840  669.55 

13,004,447.15 

6w.027.63 

14,578,379.72 

1822     

17,589,761.94 

67,665,71 

20,232  427.94 

1828 

19,088  433  44 

34  242.17 

20,540,666.26 

1824         

17,878  325.71 

34  663.37 

19,381,212.79 

1825 

20,098,718  45 

25,771.35 

21  840,858.02 

23,341  331.77 

21,5S'J.93 

25  260,434.21 

1827  

19,712,283.29 

19,835.68 

22,966,363.96 

1828  

23  205,528.64 

17,451.54 

24,  763,  62!).  28 

1829 

22  681,965  01 

14  502  74 

24,827  627.38 

1830         

21,922  391.39 

12,160.62 

24,844,116  52 

1831 

24,224,441  77 

6  933  5  1 

28  526,820  82 

1832  

28,465  237  24 

11,630.65 

31,867,450.66 

1833              

29  032,508  91 

2  769.00 

33  943,426  25 

1834  

16,214,957.15 

4,196.09 

21,791,935.55 

1835                .... 

19  391  810  59 

10  459.48 

35  430,087  10 

1836       

23,409,940.53 

370.00 

50,826,796.08 

1837            

11,169,290  39 

5,493.84 

24,954,153.04 

1838 

16  158,800  86 

2  467.27 

26  302  561.77 

23,137,924  81 

2,553.32 

81  482,749.61 

1840 

13  499  502  17 

1,682.25 

19  480  115  33 

$24  314  518  19 

1841  

14  487,216.74 

3,261.36 

16  860,100.27 

26,481,817.84 

1842       

18  187  908.76 

495.00 

19  976,197.25 

25  134  886  44 

1843  (6  months) 

7,046  843.91 

103.25 

8,231,001.26 

11,  780,  092.  61 

1844     

26,183  570.94 

1,777.34 

29  320,707.78 

22,483,560  14 

1845  

27,528,112.70 

3,517.12 

29,970,105.80 

22,935,827  79 

1846           

26  712  667.87 

2.897.26 

29  699  967  74 

27  261  182.86 

1847  

23,747,864.66 

375.  DO 

26,467,403.16 

54,920,784.09 

1848  

31  757,070.96 

375.00 

35,698,699  21 

47  618,220  65 

1849                .... 

28,346,738.82 

80,721  077  60 

43  499  078  39 

I860  

39,668,686.42 

43,592,888.88 

40,948,383.12 

1851  

49,017,567.92 

52,555,039.33 

47,751,478.41 

1852 

47  339  326  62 

49  846  815  60 

44  390  252  36 

1853  

58  ',931  ',865.  52 

61,587,031.68 

47,743,989.09 

1854  

64,224,190.27 

73,800,341.40 

55,038,455.11 

1855  

53,025,794.21 

65,359,574.68 

58,630,622.71 

1856  

64,022,863.50 

74,056,699.24 

68,726,350  01 

1857  
1858  

63,875,905.05 
41,789,620.96 



68,965,312.57 
46,655,365.96 

67,634,408.93 

73,982,492.84 



1859  

49,565,824.38 

52,777,107.92 

68  993  599  77 

1860  

53,187,511.87 

66,054,299.83 

63,200,875.65 

1861  

39,582,125.64 

41,476,299.49 

66,650  213  08 

1862 

49  056  397  62 

51  919  261  09 

469  570  241  65 

34  0% 

8      PASSING  OF  THE  GOLD  RESERVE 


TABLE   I.— ORDINARY   RECEIPTS   AND   DISBURSEMENTS   OF 

THE  UNITED  STATES.— CONTINUED 
RECAPITULATION  OF  RECEIPTS  BY  FISCAL  YEAES 


Year. 

Customs. 

Internal 
revenue. 

Ordinary 
receipts. 

Ordinary 
disbursements. 

Pre- 
mium 
on 
gold. 

1863  

$69,059,642.40 
102,316,152.99 
84,928,260.60 
179,046,651.58 
176,417,810.88 
164,464,599.56 
180,04R,426.63 
194,538,374.44 
206,270,408.05 
216,370,286.77 
188,089,522.70 
168,103,833.69 
157,167,722.35 
148,071,984.61 
130,956,493.07 
130,170,680.20 
137,250,047.70 
186,522,064.60 
198,159,676.02 
220,410,730.25 
214,706,496.93 
195,067,489.76 
181,471,939.34 
192,905,023.44 
217,286,893.23 
219,091,173.63 
223,832,741.69 
229,668,584.57 
219,522,205.23 
177,452,964.16 
203,355,016.73 
131,818,530.62 
152,158,617.45 
160,021,751.67 
176,554,126.65 
149,675,062.35 
206,128,481.75 
233,164,871.16 
238,585,455.99 
254,444,708.19 
284,479,581.81 
261,274,564.81 
261,798,856.91 
300,251,877.77 
332,233,362.70 
286,113,130.29 
300,711,933.95 
333,683,445.03 
314,497,071.24 
311,321,672.22 
318,891,395.86 
292,320,014.51 
209,786,672.21 
213,185,845.63 
225,962,393.38 
182,758,988.71 
183,428,624.78 

$37,640,787.95 
109,741,134.10 
209,464,115.25 
309,226,813.42 
266,027,537.43 
191,087,589.41 
158,356,460.86 
184,899,756.49 
143,098,153.63 
130,642,177.72 
113,729,314.14 
102,409.784.90 
110,007,493.58 
116,700,732.03 
118,630,407.83 
110,581,624.74 
113,561,610.58 
124,009,373.92 
135,264.385.51 
146,497,595.45 
144,720,368.98 
121,586,072.51 
112,498,725.54 
116,805,936.48 
118,823,391.22 
124,296,871.98 
130,881,513.92 
142,606,705.81 
145,686,249.44 
153,971,072.57 
161,027.023.93 
147,111,232.81 
143,421,672.02 
146,762,864.74 
146,688,574.29 
170,900,641.49 
273,437,161.51 
295,327,926.76 
307,180,663.77 
271,880,122.10 
230,810,124.17 
232,904,119.45 
234,095,740.85 
249,150,212.91 
269,666,772.85 
251,711,126.70 
246,212,643.59 
1289,988,519.46 
2322,529,200.79 
3321,612.199.66 
*344,416,965.65 
8380,041,  007.30 
«415,669,646.00 
'512,702,028.78 
8809,366,207.73 
93,696,043,484.81 
°3,840,230,994.85 

$112,094,945.51 
262,712,865  33 
327,283,518.08 
557,817,230.34 
477,001,523.47 
898,369,440.36 
369,564,541.47 
411,253,971.24 
383,323,944.89 
374,106,867.56 
333,738,204.67 
304,978,756.06 
288,000,051.10 
293,790,130.50 
281,250,222.78 
257,763,878.70 
272,330,241.21 
333,526,500.98 
360,782,292.57 
403,525,250.28 
398,287,581.95 
348.519,869.92 
323,690,706.38 
336,439,727.06 
371,403,277.66 
379,266,074.76 
387,050,058.84 
403,080,982.63 
392,612,447  31 
354,937,784.24 
385,819,628.78 
297,752,019.25 
313,390,075.11 
326,976,200.38 
347,721,705.26 
405,321,335.20 
515,950,520.18 
567,240,851.89 
587,685,337.53 
562,478,233.21 
560,396,674.40 
539,716,913.86 
544,606,758.62 
594,717,942.36 
663,125,659.92 
601,060,723.27 
603,589,489.84 
675,511,715.02 
701,872,374.99 
691,778,465.37 
724,111,229.84 
734,673,166.71 
697,910,827.58 
779,664,552.49 
1,118,174,126.43 
4,174,010,585.74 
4,647,603,852.46 

$718,734,276.18 
864,969,100.83 
1,295,099,289.58 
519,022,356.34 
346,729,325.78 
370,339,133.82 
321,190,597.75 
293,657,005.15 
283,160,393.51 
270,659,695.91 
285,239,325.34 
301,238,800.21 
274,623,392.84 
265,101,084.59 
241,334,474.86 
236,964,326.80 
266,947,883.53 
264,847,637.36 
259,651,638.81 
257,981,439.57 
265,408,137.54 
244,126,244.34 
260,226,935.11 
242,483,138.50 
267,932,179.97 
259,653,958.87 
281,996,615.60 
297,736,486.60 
356,372,684.74 
345,023,330.58 
383,477,954.49 
367,525,279.83 
356,195,298.29 
352,179,446.08 
365,774,159.67 
443,368,582.80 
605,072,179.85 
487,713,791.71 
509,967,353.15 
471,190,857.64 
506,089,022.04 
532,287,821.31 
563,310,093.62 
549,405,425.35 
551,705,129.04 
621,102,390.64 
662,324,444.77 
659,705,391.08 
654,137,997.89 
654,553,963.47 
682,770,705.51 
700,754,489.71 
731,399,759.11 
724,492,998.90 
1,147,898,991.16 
8,966,532,266.03 
15,365,362,741.76 

72.5% 
185.0% 
134.4% 
67.8% 
46.4% 
50.0% 
62.5% 
23.3% 
15.4% 
15.4% 
19.1% 
14.4% 
17.6% 
15.0% 
7.9% 
2.9% 

1864 

1865  

1866 

1867       

1868 

1869  

1870  

1871  

1872  

1873 

1874  

1875  

1876        .... 

1877  

1878            

1879  

1880  

1881  

1882  
1883  

1884  

1885  

1886  

1887  

1888  

1889  

1890  

1891  

1892  

1893  

1894  

1895  

1896  



1897  

1898  

1899  

1900  

1901  

1902  

1903  

1904  

1905  

1906 



1907  

1908  

1909  

1910  

1911  

1912  

1913  

1914  

1915  

1916  

1917 



1918  

1919  

1  Includes  $20,951,780.97  corporation  tax. 

2  Includes  $33,516,976.59  corporation  tax. 
8  Includes  $28,583,303.73  corporation  tax. 
*  Includes  $35,006,299.84  corporation  tax. 

6  Includes  $10,671,077.22  corporation  excise  tax;  $32,456,662.27  corporation  income  tax  ; 
and  $28,253,534.85  individual  income  tax. 

•Includes  $52,069,126.29  emergency  revenue;  $39,155,596.77  corporation  income  tax; 
and  $41,046,162.09  individual  income  tax. 

'Includes  $84,278,302.13  emergency  revenue;  $56,993,657.98  corporation  income  tax; 
and  $67,943,594.63  individual  income  tax. 

8 Includes  $95,297,553.88  emergency  revenue;  $179,572,887.86  corporation  income  tax; 
and  $180,108,340.10  individual  income  tax. 

•Includes  $2,838,999,894.28  income  and  excess  profits  tax  and  $857,043,590.53  miscella- 
neous internal  revenue. 

"Includes  $2,600,762,734.34  income  and  excess  profits  tax  and  $1,239,468,260.01  miscella- 
neous internal  revenue. 


FINANCING  THE  GOVERNMENT        9 

of  July  14,  1870  (16  Stat.  272),  for  the  purpose  of  redeeming 
on  or  after  January  1,  1879,  in  coin,  at  the  office  of  the  Assistant 
Treasurer  of  the  United  States  in  New  York,  the  outstanding 
United  States  legal  tender  notes  when  presented  in  sums  of  not 
less  than  fifty  dollars."  (Report  of  the  Secretary  of  the 
Treasury,  1919,  p.  587.) 

Pursuant  to  the  authority  conferred  upon  the 
Secretary  of  the  Treasury  by  this  statute  legal  ten- 
der notes  were  redeemed  from  time  to  time  until 
it  was  provided  by : 

"  The  Act  of  May  31,  1878  (20  Stat.  87),  that  no  more  of  the 
United  States  legal  tender  notes  shall  be  canceled  or  retired,  and 
that  when  any  of  said  notes  are  redeemed  or  received  into  the 
Treasury  under  any  law,  from  any  source  whatever,  and  shall 
belong  to  the  United  States,  they  shall  not  be  retired,  canceled, 
or  destroyed,  but  shall  be  reissued  and  paid  out  again,  and  kept 
in  circulation." 

The  Secretary  of  the  Treasury  having  given  due 
notice  that  he  was  prepared  on  and  after  January 
1, 1879,  to  redeem  at  New  York  in  coin,  outstanding 
legal  tender  notes  in  compliance  with  the  provi- 
sions of  the  Act  of  January  14,  1875,  and  that  he 
had  resolved  to  receive  the  United  States  legal 
tender  notes  in  payment  for  customs  duties,  the 
premium  on  gold  disappeared. 

The  amount  of  legal  tender  notes  outstanding  at 
the  date  of  the  passage  of  the  Act  of  May  31,  1878 
referred  to,  and  still  outstanding  June  30,  1919, 
amount  to  $346,681,016.  (Report  of  Secretary  of 
the  Treasury,  1919,  p.  582.) 

It  was  further  provided  by : 

"  The  Act  of  March  14,  1900,  that  United  States  notes,  when 
presented  to  the  Treasury  for  redemption,  shall  be  redeemed  in 
gold  coin  of  the  standard  fixed  in  said  act,  and  that  in  order  to 
secure  the  prompt  and  certain  redemption  of  such  notes  it  shall 
be  the  duty  of  the  Secretary  of  the  Treasury  to  set  apart  in  the 
Treasury  a  reserve  fund  of  one  hundred  and  fifty  million  dollars 
in  gold  coin  and  bullion,  to  be  used  for  such  redemption  pur- 
poses only,  and  that  whenever  and  as  often  as  any  of  said  notes 
shall  be  redeemed  from  said  fund  it  shall  be  the  duty  of  the 
Secretary  of  the  Treasury  to  use  said  notes  so  redeemed  to 


10    PASSING  OF  THE  GOLD  RESERVE 

restore  and  maintain  the  reserve  fund  so  <  stablished — first,  by 
exchanging  the  notes  so  redeemed  for  an/  gold  coin  in  the 
general  fund  of  the  Treasury;  second,  by  accepting  deposits  of 
gold  coin  at  the  Treasury  or  at  any  subtreasury  in  exchange  for 
such  notes;  third,  by  procuring  gold  coin  by  the  use  of  said 
notes  in  accordance  with  the  provisions  of  Section  3700  of  the 
Kevised  Statutes  of  the  United  States.  The  above-mentioned 
act  also  provides  that  if  the  Secretary  of  the  Treasury  is  unable 
to  restore  and  maintain  the  gold  coin  in  the  reserve  fund  by  the 
foregoing  methods,  and  the  amount  of  such  gold  coin  and  bullion 
in  said  fund  shall  at  any  time  fall  below  one  hundred  million 
dollars,  it  shall  be  his  duty  to  restore  the  same  to  the  maximum 
sum  of  one  hundred  and  fifty  million  dollars  by  borrowing 
money  on  the  credit  of  the  United  States,  and  for  the  debt  so 
incurred  to  issue  and  sell  coupon  or  registered  bonds  of  the 
United  States  bearing  interest  at  the  rate  of  not  exceeding 
three  per  centum  per  annum,  payable  quarterly,  l;he  bonds  to 
be  payable  at  the  pleasure  of  the  United  States  after  one  year 
from  the  date  of  their  issue,  and  to  be  payable,  principal  and 
interest,  in  gold  coin  of  the  present  standard  value,  the  gold 
coin  received  from  the  sale  of  said  bonds  to  be  exchanged  for  an 
equal  amount  of  the  notes  redeemed  and  held  for  exchange,  and 
the  Secretary  of  the  Treasury  may,  in  his  discretion,  use  said 
notes  in  exchange  for  gold,  or  purchase  or  redeem  an  bonds  of 
the  United  States,  or  for  any  other  lawful  purpose  he  public 
interests  may  require,  except  that  they  shall  not  be  used  to  meet 
deficiencies  in  the  current  revenues/' 


The  history  of  this  Legislation  shows : 

First:  That  the  legal  tender  Treasury  notes  < 1  the 
time  when  originally  authorized  were  issued 
for  the  purpose  of  meeting  the  current  run- 
ning expenses  of  the  Government  and  were 
not  a  legal  tender  for  the  payment  of  duties 
on  imports. 

Second:  That  as  long  as  they  were  not  redeemable 
in  gold  and  were  not  accepted  at  the  Treas- 
ury Department  in  payment  of  duties  on 
imports  they  depreciated  in  value,  gold  go- 
ing to  a  considerable  premium  which  disap- 
peared when  these  restrictions  were  re- 
moved. 


FINANCING  THE  GOVERNMENT      11 

Another  notable  example  of  the  issue  of  legal 
tender  notes  was  that  of  the  revolutionary  govern- 
ment of  France  during  the  years  1789-1796,  when 
legal  tender  notes  (assignats,  secured  by  confiscated 
church  lands  and  the  public  domain)  were  issued 
in  large  quantities,  without  hope  of  ultimate  re- 
demption, and  finally  became  worthless. 

These  observations  therefore  teach  us  that  the 
issue  of  legal  tender  currency  has  been  generally 
resorted  to  during  times  of  war  or  other  great  pub- 
lic emergency  when  the  current  expenses  of  the  gov- 
ernment far  exceeded  the  immediate  revenues, 
leading  invariably  to  a  depreciation  of  the  legal 
tender  notes  and  the  establishment  of  a  premium  on 
gold  with  all  its  unfortunate  consequences. 

By  reference  to  the  foregoing  table  of  ordinary 
receipts  and  disbursements  we  find  that  during  the 
years  1862  and  1863  when  the  issue  of  $450,000,000 
of  legal  tender  notes  was  authorized  by  the  United 
States  Government,  the  ordinary  receipts  were,  for 
the  year  1862,  $51,919,261.09  and  that  this  total  in- 
cluded receipts  from  customs  amounting  to  $49,- 
056,397.62  and  that  the  receipts  from  sources  other 
than  customs  amounted  to  only  $2,862,863.47 ;  also 
that  during  the  year  1863  the  ordinary  receipts 
were  $112,094,945.51  of  which  $69,059,642.40  were 
received  from  customs  indicating  receipts  from 
sources  other  than  customs  amounting  to  $43,035,- 
303.11. 

Bearing  in  mind  that  the  legal  tender  notes  issued 
under  the  Act  of  February  25, 1862,  were  not  a  legal 
tender  in  the  payment  of  duties  on  imports  it  is 
obvious  that  the  field  within  which  they  could  be 
disposed  of  by  the  holder  in  payment  of  his  obliga- 
tions to  the  government  was  decidedly  limited.  It 
is  therefore  little  to  be  wondered  that  such  notes 


12     PASSING  OF  THE  GOLD  RESERVE 

became  depreciated,  gold  going  to  a  premium  and 
remaining  at  a  premium  until  such  time  as  provi- 
sions were  finally  made  for  the  redemption  of  such 
notes  by  the  government  in  gold,  and  their  accep- 
tance at  the  United  States  Treasury  in  payment  of 
duties  on  imports. 

With  these  experiences  before  us  let  us  again 
revert  to  our  modern  country,  which,  as  it  is  living 
entirely  within  itself,  we  may  assume  is  happily  at 
peace.  We  are  therefore  in  a  position  to  enter  upon 
the  consideration  of  its  affairs  in  a  calmer  mood. 
Let  us  assume  therefore  that  the  nation  has  an  ex- 
tensive civil  establishment  for  the  administration 
of  the  affairs  of  government ;  that  it  is  maintain- 
ing an  army  and  a  navy  of  commensurate  size  to 
provide  for  the  common  defense ;  that  it  is  engaged 
in  the  deepening  of  waterways;  the  building  of 
canals;  the  construction  of  railways  in  outlying 
territories,  and  in  other  useful  and  necessary  pub- 
lic undertakings,  all  of  which  require  an  average 
daily  expenditure  of  say  $10,000,000  in  ready  money 
amounting  to  approximately  $3,650,000,000  for  the 
year.  We  will  assume  that  according  to  the  annual 
legislative  budget  provision  is  made  for  the  collec- 
tion of  internal  revenue  taxes  from  all  sources,  in- 
cluding taxes  on  incomes  and  excess  profits, 
amounting  to  a  like  sum,  say  $3,650,000,000  and  that 
by  far  the  greater  portion  of  these  total  estimated 
revenues  will  be  derived  from  taxation  on  incomes 
and  excess  profits  which  taxation  we  have  hereto- 
fore observed  does  not  flow  into  the  public  Treasury 
day  by  day,  but  is  usually  payable  at  certain  periods 
of  the  year. 

As  these  daily  expenditures  must  be  met  let  us 
authorize  the  Secretary  of  the  Treasury  of  our 
modern  Government  to  issue  legal  tender  Treasury 


FINANCING  THE  GOVERNMENT      13 

notes  day  ~by  day  in  an  amount  sufficient  to  meet  the 
actual  daily  running  expenses  of  the  Government, 
but  no  more;  providing  further  that  such  legal  ten- 
der Treasury  notes  shall  be  full  legal  tender,  for 
all  debts,  public  and  private,  of  whatsoever  kind 
or  nature,  without  reservation,  to  the  full  face  value 
thereof,  and  that  such  legal  tender  Treasury  notes 
when  received  into  the  Treasury  in  payment  of 
taxes  shall  be  reissued  day  by  day  in  payment  of  the 
actual  daily  running  expenses  as  the  needs  of  the 
Government  may  require. 

By  this  procedure  the  public  Treasury  will  at  all 
times  be  able  to  provide  for  the  payment  of  the  daily 
running  expenses  of  the  Government  in  ready 
money  without  regard  to  the  fact  that  "  the  daily 
collection  of  taxes  at  times  may  proceed  more  slowly 
than  the  daily  expenditures/'  and  as  the  total 
amount  of  legal  tender  notes  issued  under  this  au- 
thority can  at  no  time  exceed  the  total  estimated 
revenues  for  the  fiscal  year  it  follows  that  as  such 
legal  tender  notes  are  paid  back  into  the  Treasury 
they  become  self -liquidating,  so  that  by  the  end  of 
the  year  all  of  the  legal  tender  notes  issued  by  the 
Treasury  during  the  year  will  have  been  paid  back 
into  the  Treasury  as  taxes  and  none  will  be  out- 
standing. 

Such  legal  tender  Treasury  notes  being  a  full 
legal  tender  in  payment  for  all  debts  public  and 
private  to  the  full  face  value  thereof,  without  lim- 
itation or  reservation  of  any  kind  it  follows  unques- 
tionably, that  they  will  circulate  in  the  community 
freely  as  money,  at  their  full  face  value,  while 
awaiting  return  to  the  Treasury  in  payment  of 
taxes. 

By  this  simple  process  we  have  thus  discovered 
three  fundamental  principles : 


14    PASSING  OF  THE  GOLD  RESERVE 

First:  That  in  order  to  meet  the  actual  daily 
running  expenses  of  the  Government  it  will 
not  be  necessary  to  borrow  money  from  pri- 
vate or  Governmental  banking  institutions 
secured  by  short  term  notes,  or  bonds,  and 
pay  interest  thereon. 

Second:  That  for  the  purpose  of  meeting  such  ac- 
tual daily  running  expenses  the  Government 
may  issue  legal  tender  notes  without  intrin- 
sic value  other  than  that  of  the  paper  on 
which  it  is  printed ;  provided  that  the  amount 
so  issued  and  outstanding  shall  at  no  time 
exceed  the  estimated  public  revenues  for  the 
fiscal  year. 

Third:  That  it  will  not  be  necessary  to  maintain  in 
the  public  Treasury  a  Gold  Reserve,  to  in- 
sure the  redemption  of  such  notes  when  so 
issued,  as  they  will  be  automatically  re- 
deemed when  paid  back  into  the  Treasury 
day  by  day  after  having  performed  the  func- 
tion for  which  they  were  placed  in  circu- 
lation. 


CHAPTER  II 

FINANCING  THE  PUBLIC 

Having  thus  made  provision  for  financing  the 
government,  our  next  care  will  be  that  of  financing 
the  public  which  in  the  absence  of  gold,  is  equally  in 
urgent  need  of  a  circulating  money  medium  by  the 
means  of  which  it  may  be  able  to  conduct  the  smaller 
affairs  of  every-day  life. 

As  has  been  indicated  in  the  procedure  outlined 
for  financing  the  Government  the  legal  tender 
Treasury  notes  paid  out  one  day  may  come  back 
into  the  Treasury  the  next  day  in  payment  of  taxes  ; 
or  if  the  taxes  are  coming  in  slowly  and  at  irregular 
periods  such  notes  may  remain  out  of  the  Treasury 
in  active  circulation  in  the  community  for  longer 
periods,  and  in  the  meantime  serve  the  public  to 
that  extent. 

To  meet  the  necessities  of  the  Government,  and 
also  the  convenience  of  the  public,  it  may  therefore 
be  necessary  and  in  fact  advisable  to  make  provi- 
sion for  a  "  minor  currency."  This  may  consist  of 
copper  or  nickel  coins  of  small  denominations  such 
as  the  one-cent  and  five-cent  pieces  issued  under  the 
existing  laws  of  the  United  States,  and  of  paper 
subsidiary  currency  in  the  shape  of  ten-cent, 
twenty-five-cent  and  fifty-cent  pieces,  similar  to 
those  issued  during  the  "  American  Civil  War," 
1861-1865. 

Such  minor  currency  may  be  placed  in  circula- 
tion so  far  as  may  be  necessary  in  meeting  the  daily 
expenditures  of  the  public  Treasury  and  for  that 

15 


16    PASSING  OF  THE  GOLD  RESERVE 

purpose  may  form  part  of  the  total  "  legal  tender 
issue  "  heretofore  authorized.  If  issued  in  reason- 
able amounts  not  exceeding  the  actual  needs  of  the 
community,  such  "  minor  currency  "  will  remain 
in  active  circulation  and  will  perform  a  very  impor- 
tant and  essential  service  in  financing  the  smaller 
daily  transactions  of  the  people  at  large. 

While  provision  has  thus  far  been  made  for  fi- 
nancing the  public  Treasury,  and  incidentally  for 
a  partial  financing  of  the  public,  it  may  happen  that 
the  daily  payments  of  taxes  into  the  Treasury  are 
equal,  or  approximately  equal,  to  the  daily  expen- 
ditures, and  that  where  this  condition  exists  for  an 
extended  period  very  little  of  the  legal  tender 
issues  authorized  will  remain  in  circulation. 
Under  such  circumstances  it  may  therefore  become 
advisable  to  place  and  to  keep  in  active  circulation, 
legal  tender  Treasury  notes  in  an  amount  equal  to, 
say  the  total  estimated  revenues  for  the  next  suc- 
ceeding ninety  days  or  more.  This  may  be  accom- 
plished by  depositing  such  sums  as  may  be  deemed 
expedient  with  national  banking  associations  simi- 
lar to  those  now  existing  under  the  laws  of  the 
United  States,  and  for  which  provision  will  be  made 
in  a  succeeding  chapter.  This  procedure  will  be 
analogous  to  the  tissue  of  "  Short  Term  Treasury 
Notes  "  referred  to  in  the  preceding  chapter, 
with  the  distinction,  that  such  Treasury  Notes  will 
be  full  legal  tender  and  will  circulate  freely  as 
money  and  will  not  therefore  bear  interest  as  is  now 
the  case  when  "  Short  Term  Treasury  Notes  "  hav- 
ing ninety  days  or  more  to  run  are  disposed  of  to  the 
banking  associations,  to  raise  temporary  funds  for 
the  use  of  the  Government.  On  the  contrary  such 
deposits,  being  public  funds,  may  draw  interest 
under  a  practice  similar  to  that  now  pursued  by  the 


FINANCING  THE  PUBLIC  17 

United  States  Treasury  as  to  which  the  Secretary 
of  the  Treasury  in  his  annual  report  for  the  fiscal 
year  ended  June  30, 1916,  p.  7,  stated  that : 

"  The  interest  collected  on  deposits  of  public  funds  for  the 
fiscal  year  1916  and  covered  into  the  Treasury  as  a  miscellaneous 
receipt  amounted  to  $791,671.45  and  that  the  amount  of  interest 
received  on  public  deposits  for  the  past  six  fiscal  years  is  as 
follows : 

1911    $41,757.53 

1912    44,462.26 

1913    122,218.89 

1914    1,409,426.07 

1915    1,222,706.93 

1916    791,671.45 

"  The  increase  in  the  amount  of  interest  collected  since  1913 
is  due  to  the  fact  that  beginning  with  June  of  that  year  interest 
has  been  charged  upon  all  public  deposits,  except  those  in  the 
Federal  Reserve  Banks,  at  the  rate  of  two  per  cent  per  annum." 

As  such  public  deposits  are  subject  to  the  call  of 
the  Treasury  if  occasion  should  require  this  pro- 
cedure would  in  no  way  affect  the  self -liquidating 
features  of  the  notes  as  they  could  be  retired  at  will 
at  any  time  within  the  limits  of  the  fiscal  year. 

This  procedure  is  not  only  feasible,  but  has  re- 
ceived the  legislative  sanction  of  the  British  Gov- 
ernment, which  under  date  of  August  6,  1914, 
authorized  an  issue  of  currency  notes,  in  denomina- 
tions of  £  1  and  10  shillings  as  follows : 

"  The  Treasury  may,  subject  to  the  provisions  of  this  act, 
issue  currency  notes  for  one  pound  and  for  ten  shillings,  and 
these  notes  shall  be  current  in  the  United  Kingdom  in  the  same 
manner  and  to  the  same  extent  and  as  fully  as  sovereigns  and 
half-sovereigns  are  current  and  shall  be  legal  tender  in  the 
United  Kingdom  for  the  payment  of  any  amount." 

These  notes  it  appears  were  issued  to  the  public 
August  7,  1914,  and  were  deposited  with  the  Bank 
of  England  for  account  of  the  British  Government, 
as  the  practical  way  of  getting  them  into  use ;  they 
were  issued  for  various  purposes,  including  ad- 


18    PASSING  OP  THE  GOLD  RESERVE 

vances  to  banks  at  5  per  cent  per  annum  up  to  20 
per  cent  of  their  deposits;  the  volume  fluctuated 
with  the  varying  receipts  and  disbursements ;  the 
amount  outstanding  December  30,  1914,  was  £  38,- 
478,164,  and  on  June  23,  1915,  £46,199,705.  (A. 
Barton  Hepburn.  History  of  Currency  in  the 
United  States,  p.  451.) 


CHAPTER  III 

FINANCING  THE  BANKS 

Having  thus  provided  for  the  financing  of  the 
Government  and  the  general  public  the  financing 
of  the  banks  will  be  next  in  order. 

In  reporting  upon  the  English  Banking  System 
the  National  Monetary  Commission  of  the  United 
States  in  its  report  to  Congress,  1910  (61st  Con- 
gress, Senate  Document  No.  492),  stated  (paper  by 
Hartley  Withers)  that : 

"  The  most  obvious  function  of  the  joint  stock  banks  of  Eng- 
land is  the  business  of  taking  care  of  money  for  customers  and 
meeting  checks  drawn  against  their  balances.  Customers  place 
money  with  them  either  on  current  or  deposit  account.  On  cur- 
rent account  it  can  be  withdrawn  at  any  time  and  earns,  as  a 
rule,  no  interest.  Out  of  this  function  of  meeting  checks  drawn 
by  customers  against  the  sums  deposited  has  grown  the  banker's 
chief  duty,  which  is  now  the  provision  of  check  currency  for 
the  mercantile  and  financial  community. 

"  Currency  in  England  consists  of  coins,  notes,  and  checks. 
The  coins  are  minted  by  the  Government,  gold  coin  being  legal 
tender  to  any  extent,  silver  to  the  extent  of  £2  copper  to  the 
extent  of  Is.  The  silver  and  copper  coins  are  mere  tokens,  pass- 
ing at  a  conventional  value  which  is  far  above  that  of  the  metal 
contained  in  them.  The  use  of  the  metallic  currency  is  almost 
entirely  confined  to  small  retail  transactions,  especially  among 
the  poorer  classes  which  cannot  afford  the  luxury  of  a  banking 
account.  The  note  issues  are  almost  obsolete  as  currency,  the 
Bank  of  England's  being  used  chiefly  as  reserve  for  the  other 
banks,  while  the  issue  of  the  country  banks  are  so  small  as  to  be 
negligible. 

"  Most  of  the  commercial  and  financial  transactions  of  Eng- 
land to-day  are  settled  by  checks  drawn  on  the  banks  by  their 
customers.  These  checks  are  not  legal  tender,  since  it  would 
obviously  be  impossible  that  a  check  drawn  by  an  individual  on 
a  bank  could  be  legally  made  acceptable  by  a  creditor  whether  he 
wished  to  take  it  or  not. 

"Nevertheless,  the  protection  which  the  check  affords  to  its 
users  against  fraud  has  been  sufficient  to  make  its  use  general. 
And  the  English  community  thus  conducts  exchanges  between 

19 


20    PASSING  OF  THE  GOLD  BESERVE 

itself  by  means  of  an  enormous  number  of  pieces  of  paper  drawn 
upon  banks  which  purport  to  give  the  holder  the  right  to  demand 
gold  or  legal  tender,  but  are,  as  a  matter  of  fact,  in  an  over- 
whelming proportion  crossed  off  against  one  another  in  the 
bankers'  clearing  houses.  This  check  currency  is  provided  by 
the  banks  without  any  legal  restriction  or  supervision.  It  has 
been,  ever  since  the  beginning  of  banking,  the  business  of  the 
banker  to  finance  trade  and  commerce  by  lending  it  what  is 
called  money.  Before  printed  instruments  were  known,  bankers, 
who  were  in  those  days  goldsmiths  and  bullion  dealers,  lent 
actual  coin  to  their  customers.  When  bank  notes  were  invented, 
the  bankers  lent  their  own  promises  to  pay,  which  were  circu- 
lated among  the  community  and  took  the  place  of  coin  currency. 
When  the  use  of  checks  drove  out  the  bank  note,  as  happened  in 
England,  the  bankers  lent  their  customers  not  their  own  promises 
to  pay,  but  the  right  to  draw  checks,  involving  a  promise  on  their 
part  to  meet  the  checks  on  demand.  These  checks  drawn  are 
paid  into  the  other  banks,  and  the  check  currency  of  England 
thus  consists  to  a  great  extent  of  certificates  of  mutual  indebted- 
ness between  the  banks  and  their  customers.  The  loans  and  dis- 
counts made  by  one  bank  create  the  deposits  of  another,  and  the 
check  currency  represents  transfers  of  the  credit  so  created.  If 
the  balance  sheet  of  an  English  bank  is  examined,  it  will  be 
found  that  its  liabilities  consist  to  a  small  extent  of  its  capital 
and  reserve  fund,  to  a  very  large  extent  of  its  current  and  deposit 
accounts,  which  are  its  liabilities  to  its  customers,  and  again  to  a 
small  extent  of  acceptances. 

"  On  the  assets  side  will  be  found  '  cash  in  hand  and  at  the 
Bank  of  England/  which  represents  the  till  money  and  cash 
reserve — the  coin  and  legal  tender  actually  held  by  the  bank — 
and  its  credit  at  the  Bank  of  England.  The  next  item  is  gen- 
erally cash  at  call  and  short  notice,  which  consists  chiefly  of  the 
bank's  loans  to  discount  houses  and  also  in  some  cases  of  advances 
to  stockbrokers  and  others  from  whom  it  may  expect  to  be  easily 
able  to  call  them  in.  Its  investments  will  be  a  fairly  considerable 
item,  but  in  most  cases  a  large  proportion  of  assets  will  consist 
of  discounts,  loans,  and  advances.  By  making  these  discounts, 
loans  and  advances  the  banks  create  deposits  for  themselves  and 
for  one  another. 

"  A  customer  who  has  raised  a  credit  by  a  discount  or  advance 
makes  use  of  this  credit  to  draw  a  check.  He  passes  the  check 
to  his  creditor,  his  creditor  pays  it  into  his  own  bank,  and  as  long 
as  the  discount  or  advance  is  current  there  will  be  a  deposit 
against  it  in  the  books  of  one  bank  or  another.  In  the  rare  cases 
in  which  the  customer  uses  his  credit  for  the  withdrawal  of  coin 
or  notes,  the  same  process  will  work,  he  will  pass  them  on  to  a 
creditor  who  will  ultimately  pay  them  into  a  bank,  in  the 
enormous  majority  of  cases.  The  extent  to  which  banks  can 
create  credit  by  means  of  loans  and  discounts  is  regulated  only 
by  their  prudence  and  by  the  rules  which  apply  to  their  business- 


FINANCING  THE  BANKS  21 

"  If  they  advance  too  much,  their  credit  at  the  Bank  of  Eng- 
land will  be  diminished,  owing  to  the  fact  that  the  claims  against 
them  in  the  clearing  house  will  be  heavier  than  the  claims  which 
they  have  to  present  against  other  banks.  The  result  will  be 
that  the  proportion  of  their  cash  to  liabilities  will  be  brought 
down  to  a  point  which  is  lower  than  they  consider  prudent. 

"  There  is  no  legal  obligation  of  any  sort  on  them  to  maintain 
any  regular  proportion  between  cash  and  liabilities,  and  as  their 
position  in  this  respect  is  only  subjected  to  occasional  publicity 
they  are  not  obliged  to  consider  even  the  effect  upon  their  cus- 
tomers of  any  considerable  variation  in  the  proportion  between 
cash  and  liabilities  which  they  keep.  The  system  thus  works 
out  with  extreme  elasticity  and  banking  facilities  can  be  pro- 
vided in  England  with  extraordinary  ease.  It  has  of  late  years 
been  frequently  contended  that  the  ease  and  elasticity  with 
which  it  works  have  carried  the  English  banking  machinery  to 
a  somewhat  extreme  length  in  the  matter  of  economy  of  gold 
and  legal  tenders  and  the  extent  of  the  credit  pyramid  which  it 
builds  upon  them.  It  has  been  stated  by  a  president  of  the 
English  Bankers'  Institute  that  the  proportion  of  cash  to  lia- 
bilities shown  by  country  banks  ranges  down  to  a  point  as  low 
as  2.2  per  cent. 

"  Apart  from  the  over-multiplication  of  credit  on  an  inade- 
quate cash  basis,  the  complete  absence  of  any  legal  or  other 
restrictions  on  the  operations  of  English  banking  enables  it 
to  work  with  extraordinary  ease  and  readiness.  As  long  as 
good  unpledged  security,  whether  in  the  form  of  bills  of  ex- 
change, commodities,  or  Stock  Exchange  securities,  are  available 
in  the  hands  of  customers  the  banks  can  advance  against  them 
to  any  extent  that  they  consider  prudent.  Prudence  dictates  in 
the  case  of  the  great  majority  of  them  that  a  certain  proportion 
of  cash  to  liabilities  shall  be  maintained. 

"  The  chief  function  of  the  joint  stock  banks  having  thus 
been  shown  to  be  the  provision  of  currency  for  the  English  com- 
munity, it  may  further  be  noted  that  a  remarkable  development 
has  been  the  rapidity  with  which  they  have  covered  England  with 
branch  establishments. 

"  The  result  of  it  is  to  give  the  English  monetary  system  the 
power  of  easily  supplying  the  needs  of  the  various  parts  of  the 
community  as  the  requirements  of  others  ebb  and  flow. 

"  The  rapid  increase  in  these  various  centers  at  which  the 
public  can  obtain  banking  facilities  of  the  modern  English  kind 
—that  is  to  say,  the  right  to  draw  checks — is  certainly  one  of  the 
influences  which  have  reduced  the  circulation  of  bank  notes  in 
England  in  the  hands  of  the  public,  but  it  has  probably  tended 
slightly  to  increase  or  maintain  the  circulation,  or  at  least 
issue,  of  Bank  of  England  notes,  since  all  these  widely  dispersed 
branches  of  the  other  banks  require  to  have  a  certain  number  of 
Bank  of  England  notes  in  their  tills  as  reserve  against  demands 
on  them." 


22    PASSING  OP  THE  GOLD  BESERVE 

This  brief  description  of  the  operations  of  the 
Joint  Stock  Banks  of  England  may  be  taken  as  a 
typical  representation  of  the  mechanism  of  modern 
commercial  banking.  In  the  details  the  operations 
may  differ  somewhat  in  other  countries;  thus 
under  the  National  Banking  Laws  of  the  United 
States  various  restrictions  are  imposed  as  to  cap- 
italization ;  the  nature  and  size  of  the  loans  to  be 
made ;  the  amount  of  the  reserve  to  be  kept  on  hand 
against  deposits;  the  requirement  of  publishing 
at  frequent  intervals  a  full  statement  as  to  the  con- 
dition of  such  banking  institutions  and  the  pro- 
vision for  periodical  examinations  of  the  banks  by 
duly  constituted  Government  officials.  In  the  main, 
therefore,  it  may  be  assumed  that  it  is  the  function 
of  commercial  banking  institutions  as  stated,  to 
supply  the  mercantile  community  with  banking 
credit  and  with  a  check  currency. 

In  making  provision  therefore  for  the  establish- 
ment of  a  commercial  banking  system  the  first  es- 
sential will  necessarily  be  that  of  supplying  capi- 
tal. Having  heretofore  in  the  preceding  chapters 
placed  in  active  circulation  in  the  community  legal 
tender  Treasury  notes  this  capital  may  be  fur- 
nished by  the  organizers  of  the  banking  institutions 
through  the  deposit  of  such  legal  tender  Treasury 
notes  for  the  purpose  of  forming  a  working  basis. 
These  notes  will  also  form  the  reserve  against  de- 
posits that  the  banks  may  deem  prudent  to  keep  on 
hand,  or  that  the  banking  laws  of  the  country  may 
require  them  to  maintain. 

Such  banks  when  organized  may  be  permitted  to 
engage  in  commercial  banking  in  its  most  modern 
and  approved  form;  subject  however  to  the  one 
definite  and  positive  prohibition,  that  under  no  cir- 


FINANCING  THE  BANKS  23 

cumstances  shall  they  be  authorized  to  issue  for  cir- 
culation bank  notes  with  full,  partial,  or  no  legal 
tender  qualities,  based  upon  the  credit  of  such  insti- 
tutions, secured  or  unsecured. 

If  this  course  is  pursued  it  follows  that  no  matter 
how  reckless  the  affairs  of  such  institutions  may  be 
conducted,  they  can  never  involve  the  stability  of 
the  national  currency.  They  may  lose  every  dollar 
of  their  deposits,  dissipate  their  own  capital,  and 
fail  absolutely;  but  the  credit  of  the  nation  as 
exemplified  by  the  legal  tender  Treasury  notes  out- 
standing will  not  be  impaired. 

Fortunately  it  is  the  most  modern  trend  in  nearly 
all  countries  to  either  prohibit  absolutely  the  issue 
of  bank  notes  by  private  banking  institutions,  or 
to  greatly  restrict  such  issues  where  still  authorized, 
in  lieu  of  which,  however,  provision  is  made  in  vari- 
ous countries  for  the  establishment  of  banking  insti- 
tutions of  a  semi-Governmental  nature,  operating 
under  Governmental  supervision  and  control,  with 
authority  to  issue  under  certain  conditions  bank 
notes  with  full  legal  tender  qualities,  and  this  leads 
us  to  the  consideration  of  what  is  generally  known 
as  "  Emergency  Currency.'' 


CHAPTER  IV 

EMERGENCY  CURRENCY 

We  have  thus  far  witnessed  the  establishment  of 
a  legal  tender  Treasury  note  currency  to  supply  the 
needs  of  the  National  Government  and  incidentally 
to  furnish  a  circulating  medium  for  the  use  of  the 
general  public,  also  the  formation  of  commercial 
banking  institutions  to  provide  bank  credits  and  a 
check  currency  to  meet  the  demands  of  commerce, 
which  under  ordinary  circumstances  might  be  con- 
sidered ample  to  supply  the  needs  of  all  concerned 
were  it  not  for  the  fact  that  the  requirements  of 
modern  commerce,  and  the  rapidity  with  which  it 
is  conducted,  frequently  bring  about  conditions 
under  which  an  immediate  supply  of  additional  cur- 
rency becomes  absolutely  necessary. 

As  has  been  stated,  currency  in  England  consists 
mainly  of  gold  and  silver  coins,  Bank  of  England 
Notes,  and  checks.  We  have  also  observed  that 
under  the  commercial  banking  system  of  that  coun- 
try the  currency  deposited  by  one  depositor  may 
create  the  bank  reserve  on  which  loans  of  ten  or 
more  times  in  volume  are  made  to  ten  or  more  de- 
positors of  the  same  bank. 

Experience  has  shown  that  during  times  of  or- 
dinary commercial  activity  this  ratio  of  cash  re- 
serves to  loans  has  been  reasonably  safe  for  the 
reason  that,  taken  as  a  whole,  the  daily  deposits 
and  withdrawals  approximately  counterbalance 
one  another.  This  relationship,  however,  is  seri- 
ously interfered  with  when  during  periods  of  pub- 

24 


EMERGENCY  CURRENCY  25 

lie  unrest,  or  adverse  trade  conditions,  depositors 
in  considerable  numbers  withdraw  funds  from  their 
banks,  thereby  taking  away  the  bank  reserve  sup- 
porting the  loans  to  each  of  the  other  ten  or  more 
depositors  and  forcing  the  banks  to  call  for  the 
repayment  of  considerable  numbers  of  such  loans 
to  restore  the  reserve.  These  loans  may  have  been 
secured  by  Government  bonds,  stock  exchange  se- 
curities, warehouse  certificates  representing  goods 
stored  to  await  a  market,  and  notes,  drafts,  or  bills 
of  exchange  covering  goods  actually  moving  in  com- 
merce. If  representing  bonds  and  stock  exchange 
securities,  the  sudden  calling  in  of  the  loans  may 
force  the  immediate  sale  of  such  securities  in  the 
open  market  in  large  quantities  thereby  creating, 
as  has  often  been  the  case,  stock  exchange  panics. 
If  represented  by  warehouse  certificates,  covering 
goods  stored,  the  sudden  throwing  of  such  goods  on 
the  market,  may  involve  wide-spread  commercial 
ruin  and  disaster.  If  such  financial  panic,  and  com- 
mercial ruin  and  disaster  is  to  be  avoided,  it  is  ob- 
vious that  prompt  and  efficient  relief  is  called  for. 
To  afford  this  relief  and  to  provide  means  where- 
by commercial  banking  institutions  may  realize 
promptly  upon  their  assets  held  as  security  against 
loans  made  by  them  to  private  depositors,  as  here- 
tofore stated,  there  have  been  established  under  the 
banking  systems  of  various  European  countries, 
semi-governmental  banking  institutions  with  a 
paid-in  capital  of  considerable  volume,  operating 
more  or  less  under  governmental  supervision  and 
control.  In  times  of  stress  these  semi-governmental 
banking  institutions  may  in  some  instances  advance 
to  commercial  banking  institutions  ready  funds 
from  their  paid-in  capital  on  the  deposit  with  them 
of  government  bonds,  or  securities,  and  in  other  in- 


26    PASSING  OF  THE  GOLD  EESERVE 

stances  by  the  deposit  with  them  for  rediscount,  of 
commercial  bills  of  exchange,  maturing  within 
ninety  days  or  less  from  the  date  of  issue,  endorsed 
by  two  or  three  responsible  parties  to  the  transac- 
tion. 

It  is  of  course  obvious  that  this  transaction  con- 
sidered by  itself  results  merely  in  creating  a  ready 
market  for  the  disposal  of  the  most  desirable  and 
liquid  assets  held  by  the  commercial  banking  insti- 
tutions and  that  by  advancing  money  on  such  trans- 
actions from  their  capital  the  semi-governmental 
banking  institutions  create  no  new  currency. 
Therefore  were  the  relief  that  might  be  afforded 
under  the  conditions  referred  to,  restricted  solely 
to  advances  from  the  paid-in  capital  of  the  semi- 
governmental  banking  institutions  as  stated  no 
"Emergency  Currency  "  would  be  created. 

The  term  "Emergency  Currency  "  is  therefore 
generally  understood  to  refer  to  new  or  additional 
currency,  that  is,  to  currency  issued  in  addition  to 
that  already  existing.  In  order  therefore  that  such 
new  or  additional  currency  may  be  provided  for  to 
replace  the  existing  regular  currency  withdrawn 
from  active  circulation  during  times  of  stress, 
semi-governmental  banking  institutions  are  au- 
thorized under  the  laws  of  their  respective  coun- 
tries to  issue  "  bank  notes  "  with  full  legal  tender 
qualities.  The  conditions  under  which  such  bank 
notes  may  be  issued  differ  in  the  various  countries. 

Thus  under  the  English  System  (Report  of  U.  S. 
Monetary  Commission,  paper  by  Hartley  Withers) , 
it  is  the  function  of  the  Bank  of  England  to  act  as : 

"  1.  Banker  to  the  British  Government. 

"  2.  Banker  to  the  joint  stock  and  private  banks. 

"  3.  (a)  Sole  possessor  of  the  right  to  issue  notes  which  are 
legal  tender  in  England,  (b)  sole  possessor  among  joint  stock 
banks  with  an  office  in  London,  of  the  right  to  issue  notes  at  all. 


EMERGENCY  CURRENCY  27 

"  4.  Provider  of  r  Emergency  Currency/ 
"  5.  Keeper  of  the  gold  reserve  for  British  banking. 
"  6.  Keeper  of  the  gold  reserve  which  is  most  readily  available 
for  the  purposes  of  international  banking. 

"  These  various  functions  fit  into  and  supplement  one  another, 
and  though  their  diversity  is  sometimes  pointed  to  as  throwing 
too  much  responsibility  onto  one  institution,  it  in  fact  enables 
the  Bank  to  carry  out  its  duties  with  extraordinary  ease,  and 
with  the  least  possible  disturbance  to  the  financial  community. 
By  the  fact  that  it  keeps  the  balances  of  the  other  banks,  the 
Bank  of  England  is  enabled  to  conduct  the  payment  of  the 
interest  on  the  British  debt  largely  by  transfers  in  its  books. 
By  the  fact  that  it  keeps  the  balances  of  the  Government  and 
has  the  monopoly  of  the  legal-tender  note  issue,  the  Bank  has  a 
great  prestige  in  the  eyes  of  the  general  public,  which  it  com- 
municates to  the  other  banks  which  bank  with  it.  There  is  an 
impression  that  the  Government  is  always  behind  the  Bank,  and 
that  the  Bank  is  always  behind  the  other  banks,  and  this  feeling 
has  certainly  done  much  to  foster  the  confidence  of  the  British 
public  in  its  banking  system. 

"  A  credit  in  the  books  of  the  Bank  of  England  has  come  to 
be  regarded  as  just  as  good  as  so  much  gold;  and  the  other 
banks,  with  one  exception,  habitually  state  their  '  cash  in  hand 
and  at  the  Bank  of  England '  as  one  item  in  their  balance  sheets, 
as  if  there  were  no  difference  between  an  actual  holding  of  gold 
or  legal  tender  and  a  balance  at  the  Bank  of  England.  It  thus 
follows  at  times  when  an  increase  of  currency  is  desirable,  it 
can  be  expanded  by  an  increase  in  the  balances  of  the  other 
banks  at  the  Bank  of  England,  since  they  thus  become  possessed 
of  more  cash  to  be  used  as  the  basis  of  credit.  For  currency  in 
England  chiefly  consists  of  checks,  and  customers  who  apply  to 
the  banks  for  accommodation,  by  way  of  discount  or  advance, 
use  it  by  drawing  a  check  which  is  passed  on  and  so  creates  a 
deposit;  and  expansion  of  currency  thus  consists  chiefly  in  ex- 
pansion of  banking  deposits.  This  expansion  is  only  limited  by 
the  proportion  between  deposits  and  cash  which  the  banks  think 
fit  to  keep,  and  as  long  as  they  can  increase  their  cash  by  increas- 
ing their  credit  in  the  Bank  of  England's  books  the  creation  of 
currency  can  proceed  without  let  or  hindrance.  Their  balances 
can  be  increased  by  borrowing  from  the  Bank  of  England,  which 
is  generally  carried  out  not  by  the  banks  themselves,  but  by  their 
customers  from  whom  they  have  called  in  loans,  and  the  Bank  of 
England  is  thus  enabled  to  provide  emergency  currency  with 
great  ease,  by  means  of  loans  and  discounts  which  are  used  to 
swell  the  balances  of  the  other  banks,  which  thus  show  an  increase 
of  the  cash  at  the  Bank  of  England  which  they  use  as  a  basis  for 
credit  operations.  The  elasticity  of  the  system  is  thus  remark- 
able, and  the  merchants  and  bill  brokers  of  London  can  by  taking 
approved  security  to  the  Bank  of  England,  increase  the  basis  of 
English  credit  in  a  few  minutes  by  borrowing. 


28    PASSING  OF  THE  GOLD  RESERVE 

"  1.  Examining  these  functions  of  the  Bank  of  England  in 
closer  detail  we  find  that  its  first  and  most  obvious  one,  which 
originally  brought  it  into  being,  of  financing  the  British  Gov- 
ernment and  acting  as  its  banker,  is  now  perhaps  its  least  difficult 
and  important  duty.  Apart  from  the  prestige  which  it  thus 
acquires  and  its  close  touch  with  the  Government  and  the  officials 
of  the  Treasury,  the  Bank's  position  as  government  banker  is  of 
little  direct  material  advantage.  Its  duties  as  such,  besides  the 
normal  relation  between  a  bank  and  a  customer,  consist  chiefly 
in  making  advances  to  the  treasury  in  the  shape  of  '  deficiency 
advances '  when  the  government  balances  are  too  low  to  admit  of 
the  payment  of  the  quarterly  interest  on  the  British  debt  without 
replenishment,  or  against  '  ways  and  means '  advances  at  times 
when  the  revenue  is  coming  in  more  slowly  than  government 
expenditure  is  proceeding.  It  also,  when  the  Government  has 
to  borrow  to  a  greater  extent,  manages  its  issues  of  treasury  bills, 
or  any  loan  operation  that  the  Government  may  have  to  under- 
take, such  as  the  creation  of  fresh  debt  in  time  of  war,  or  the 
periodical  borrowing  recently  necessitated  by  the  requirements 
of  the  Irish  land-purchase  scheme.  The  variations  in  the  amount 
of  the  Government's  balance  at  the  Bank  of  England  are  a  ques- 
tion of  great  importance  to  the  outside  money  market,  because 
when  this  balance  is  big  the  result  is  that  a  large  amount  of 
money  is  in  the  control  of  the  Bank  of  England,  and  the  resources 
of  the  outer  market  are  thus  curtailed. 

"It  has  already  been  shown  that  the  balances  of  the  other 
banks  at  the  Bank  of  England  are  treated  by  them  as  cash  and 
used  as  the  basis  of  credit.  Consequently  when  the  payment  of 
revenue  on  a  large  scale  transfers  large  amounts  from  the  other 
banks  to  the  government  account  in  the  Bank  of  England's 
books,  the  outer  market's  basis  of  credit  is  thus  reduced  and 
money  tends  to  become  scarce  and  dear.  This  is  especially 
noticeable  in  the  last  quarter  of  the  financial  year,  January  to 
March,  when  the  payment  of  the  direct  taxes  (income  tax,  and 
house  duty)  transfers  many  millions  from  the  tax-paying  public, 
through  its  bankers,  to  the  national  exchequer's  credit  at  the 
Bank.  Between  December  28,  1907,  and  March  27,  1908,  public 
deposits,  or  government  balances,  at  the  Bank  of  England  rose 
from  £5,625,000  to  £19,843,000  by  the  operation  of  this  process. 
This  transfer  makes  a  gap  in  the  basis  of  credit  which  has  to  be 
filled  up  by  borrowing,  and  it  is  usual  to  find  that,  according  to 
the  phrase  current  in  Lombard  Street,  'the  market  is  in  the 
Bank ' — that  is,  the  merchants  and  brokers  are  borrowing  from 
the  Bank  of  England  throughout  the  greater  part  of  this  quarter 
of  the  year.  When  the  market  is  borrowing  from  the  Bank  it 
does  so  either  by  discounting  bills  with  it  at  Bank  rate,  which  is 
the  official  minimum  rate  of  discount,  or  by  taking  advances  on 
securities,  for  which  advances  it  usually  pays  one-half  of  1  per 
cent  above  Bank  rate;  and  since  Bank  rate  is,  except  on  quite 
rare  occasions,  above  the  rates  for  loans  and  discount  current  in 


EMERGENCY  CURRENCY  29 

the  outside  market,  it  will  be  seen  that  this  transfer  of  revenue 
funds  to  the  Government's  balance  normally  raises  the  current 
value  of  money  during  the  period  in  which  it  is  proceeding. 

"  Dealers  in  credit,  who  are  pinched  in  pocket  by  this  habitual 
decrease  in  the  supply  of  money  at  this  season,  cry  out  against 
the  system,  and  maintain  that  the  revenue  ought  to  be  dis- 
tributed among  the  other  banks  until  it  is  required  for  govern- 
ment disbursements  at  the  end  of  the  quarter,  in  the  same  man- 
ner as  the  United  States  Treasury  deposits,  when  placed  with 
the  American  banks,  are  divided  among  many.  Such  a  change, 
however,  would  obviously  strike  at  the  very  basis  of  the  English 
system,  which  has  grown  up  with  all  its  anomalies  into  a  very 
practical  and  trustworthy  instrument.  If  the  Bank  of  England 
were  deprived  of  its  privilege  of  holding  the  revenue  as  paid  in, 
it  would  have  to  be  remunerated  more  highly,  not  only  for  the 
other  work  that  it  does  for  the  Government,  but  also  for  per- 
forming other  functions  for  the  community,  which,  as  will  be  seen 
later,  throw  onto  it  responsibilities  which  hamper  its  earning 
power  as  a  banker.  If  any  alteration  is  necessary  of  an  arrange- 
ment which  causes  chronic  inconvenience  to  dealers  in  credit 
during  the  greater  part  of  a  quarter  of  the  year,  it  would  more 
naturally  be  found  in  a  reorganization  of  the  system  under 
which  most  of  the  direct  taxes  are  paid  in  one  quarter.  It  has 
already  been  shown  that  the  position  of  the  Bank  of  England  as 
government  bank  gives  it  a  prestige  in  the  eyes  of  the  public, 
which  it  passes  on  to  the  other  banks  which  are  its  customers; 
and  a  banking  system  is  so  largely  a  psychological  matter  that 
the  most  radical  reformer  would  hesitate  before  making  any 
alteration  which  would  tend  to  shake  the  basis  of  this  prestige. 

"2.  The  second  of  the  Bank  of  England's  distinctive  func- 
tions— its  acting  as  banker  to  the  rest  of  the  English  banking 
community — is  the  one  which  throws  upon  it  its  most  serious 
responsibilities  and  gives  it  most  of  its  actual  power  and  ease  in 
working.  The  Government  gives  it  prestige  in  the  eyes  of  the 
multitude,  which  considers  that  governments  are  omnipotent; 
the  other  banks  give  it  the  power  of  providing  emergency  cur- 
rency by  making  entries  in  its  books,  and  so  acting  as  the  easily 
efficient  center  of  a  banking  system  in  which  elasticity  and  the 
economy  of  gold  are  carried  to  a  perfection  which  is  almost 
excessive.  Nevertheless,  it  pays  heavily  for  its  apparently 
privileged  position  as  bankers'  bank.  At  first  sight  it  would 
appear  that  these  customers,  keeping  a  regular  balance  of 
twenty-odd  millions,  which  varies  little  and  on  which  the  Bank 
of  England  pays  no  interest,  were  a  source  of  comfortable 
income  and  no  anxiety  to  it.  But  in  the  first  place  it  is  obvious 
that  a  liability  which  is  regarded  as  cash  by  the  rest  of  the  bank- 
ing community  requires  special  treatment  by  its  custodian,  and 
in  practice  it  is  so  specially  treated  that  the  Bank  of  England 
maintains  a  proportion  of  cash  to  liabilities  which  is  fully  twice 
as  high  as  that  of  the  strictest  of  the  other  banks.  This  pro- 


30    PASSING  OF  THE  GOLD  RESERVE 

portion  rarely  is  allowed  to  fall  below  33  per  cent  and  generally 
ranges  between  40  and  50  per  cent,  and  it  need  not  be  said  that 
this  high  level  of  cash  holding  tells  heavily  on  the  earning  power 
of  the  Bank  of  England.  Moreover,  it  is  its  position  as  bankers' 
bank  that  exposes  the  Bank  of  England  to  the  responsibility  of 
maintaining  the  gold  reserve  for  English  banking  and  being 
prepared  to  meet,  in  gold,  any  draft  on  London  that  anyone 
abroad  who  has  acquired  or  borrowed  the  right  to  draw  wishes 
to  turn  into  metal  to  be  shipped  to  a  foreign  country. 

"  The  amount  of  the  bankers'  balances  is  not  separately  stated, 
but  is  wrapped  up  in  the  total  of  the  other  deposits  in  the  Bank 
of  England's  weekly  return.  It  its  believed  to  average  about 
22  millions  in  these  days,  and  it  is  often  contended  that  valuable 
light  would  be  thrown  on  the  monetary  position  if  this  item 
were  separated  from  the  balances  of  the  other  customers  of  the 
Bank.  Many  of  the  outer  bankers  are  in  favor  of  this  change, 
but  there  is  a  serious  practical  objection  to  it,  in  that  a  dangerous 
impression  might  be  created  in  the  public  mind  if  at  any  time  it 
were  seen  that  the  Bank's  cash  reserve  was  below  its  liability  to 
its  banking  customers;  and  the  separate  publication  of  the 
bankers'  balances  might  thus  check  the  readiness  with  which 
the  Bank  of  England  creates  emergency  credit.  Another  sug- 
gestion that  is  sometimes  made  by  the  many  critics  of  the  exist- 
ing order  of  things  in  English  banking  is  that  the  banks  should 
keep  their  cash  reserves  themselves;  but  this  very  revolutionary 
change  would  deprive  the  system  of  its  two  great  advantages,  a 
centralized  organization  with  a  center  which  specializes  on  the 
duties  involved  by  acting  as  center,  and  the  extreme  elasticity 
with  which  the  present  arrangements  work.  At  the  same  time 
it  must  be  admitted  that  the  system  by  which  the  other  banks 
treat  their  balances  at  the  Bank  of  England  as  cash  leads  to  the 
existence  of  a  vast  amount  of  ( cash '  in  England  which  on  being 
looked  into  is  found  to  consist  of  paper  securities  or  promises  to 
pay.  If  we  assume  that  the  proportion  of  cash  held  by  the  Bank 
of  England  is  50  per  cent  of  its  liabilities — it  does  not  always 
stand  so  high — the  other  50  per  cent  being  represented  by 
securities,  this  at  once  shows  that  only  half  the  bankers'  balances 
are  backed  by  cash.  And  we  shall  see  when  we  look  into  its 
weekly  return  that  its  cash  in  its  banking  department,  of  which 
the  bankers'  balances  are  a  liability,  consists  largely  of  its  own 
notes;  and  its  own  notes  are  backed,  to  the  extent  of  about  one- 
third,  by  securities.  So  that  the  actual  gold  held  against  these 
bankers'  balances  consists  roughly  of  about  two-thirds  of  a  half 
of  them,  or  one-third  of  their  total.  And  when  it  is  considered 
that  these  bankers'  balances  are  treated  by  the  bankers  as  equal 
to  cash  in  hand  and  are  made  the  basis  of  credit,  on  which  they 
build  liabilities  ranging  from  five  to  ten  or  even  in  extreme  cases 
to  fifty  times  their  extent,  it  becomes  evident  that  the  critics 
who  maintain  that  the  multiplication  of  credit  and  the  economy 
of  gold  are  carried  too  far  in  England  have  a  solid  foundation 
for  their  contention. 


EMERGENCY  CURRENCY  31 

"  3.  The  Bank  of  England's  monopoly  of  note  issue,  which  once 
gave  it  the  monopoly  of  joint-stock  banking  in  London,  is  now  a 
matter  of  comparatively  minor  importance,  owing  to  the  change 
in  English  banking  habits  by  which  the  check  has  ousted  the 
bank  note  for  the  purpose  of  daily  commercial  payments,  and  the 
regulations  which  were  imposed  on  the  note  issue  by  the  bank 
act  of  1844.  Its  monopoly  lay  in  the  provision,  which  was  one  of 
its  early  privileges,  that  '  it  shall  not  be  lawful  for  any  body 
politic  or  corporate  whatsoever,  or  for  any  other  persons  whatso- 
ever, united  or  to  be  united,  in  covenants  or  partnerships  exceed- 
ing the  number  of  six  persons,  in  that  part  of  Great  Britain 
called  England,  to  borrow,  owe,  or  take  up  any  sum  or  sums  of 
money  on  their  bills  or  notes  payable  at  demand.'  This  monopoly 
was  conferred  on  the  Bank  in  1706  and  was  maintained  until 
1826,  when  the  implied  monopoly  in  joint-stock  banking  was 
restricted  to  a  65-mile  radius  around  London.  In  1833  joint- 
stock  banks  were  established  in  London  itself,  since  it  had  been 
discovered  that  the  Bank  of  England's  alleged  monopoly  only 
reserved  to  it  the  privilege  of  note  issue,  and  the  private  bankers 
in  London  had  already  found  that  it  was  more  convenient  to 
banker  and  customer  to  work  by  the  system  of  deposit  and  check. 
By  this  system  a  customer  who  took  a  loan  from  his  banker  did 
not  carry  it  away  with  him  in  the  form  of  notes,  but  was  given 
a  deposit  or  credit  in  the  bank's  books  and  the  power  of  drawing 
checks  against  it.  The  development  of  this  system  has  made 
money  in  England  mean,  as  a  rule,  a  credit  in  the  books  of  a 
bank  which  enables  its  holder  to  draw  checks,  and  has  made 
checks  the  chief  currency  of  the  country. 

"  The  development  of  this  system  was  quickened  by  the  pro- 
visions of  Peel's  Act  of  1844,  which,  under  the  influence  of 
banking  disasters  that  had  arisen  out  of  reckless  note  issuing 
by  private  banking  firms  in  the  counties,  laid  down  an  iron  rule 
for  the  regulation  of  note  issues  in  England.  None  of  the  other 
note  issuers  were  allowed  to  increase  their  issues  under  any  cir- 
cumstances, and  the  Bank  of  England,  for  every  additional  note 
issued  beyond  £14,000,000,  was  to  hold  metal  in  its  vaults. 
Tinder  the  terms  of  Peel's  Act  one-fifth  of  this  metal  might  be 
silver,  and  in  the  early  returns  issued  by  the  Bank  under  the 
act  a  certain  amount  of  silver  is  found  among  the  assets  of  the 
issue  department.  In  the  first  return  issued,  for  example,  which 
was  dated  September  7,  1844,  the  total  note  issue  was  £28,- 
351,000,  which  was  backed  by  £14,000,000  in  securities,  £12,657,- 
000  in  gold  coin  and  bullion  and  £1,694,000  in  silver.  But 
since  1853,  no  silver  has  been  held  in  the  issue  department  of 
the  Bank,  and  in  1897,  when  the  influence  of  the  bimetallists  on 
the  existing  Government  led  to  a  proposal  that  the  proportion 
of  silver  allowed  by  law  should  be  held  by  the  Bank  as  backing 
for  its  note  issue,  public  opinion  expressed  itself  so  vigorously 
that  the  suggestion  was  promptly  buried.  The  Bank's  fiduciary 
note  issue,  thus  fixed  at  £14,000,000,  was  only  allowed  to  increase 


32    PASSING  OF  THE  GOLD  RESERVE 

by  the  lapse  of  the  issues  of  the  existing  issuers,  the  Bank  being 
empowered  to  increase  it  by  two-thirds  of  the  amount  lapsed. 
The  lapsing  process  has  proceeded  steadily  by  the  amalgamation 
of  country  banks  with  banks  which  have  London  offices  and  so 
are  prohibited  by  the  Bank's  monopoly.  And  the  Bank's  fiduci- 
ary issue  has  thus  been  raised  from  the  original  £14,000,000  to 
£18,450,000.  Above  this  line  it  cannot  go  except  by  means  of 
the  suspension  of  the  bank  act,  which  has  been  found  necessary 
occasionally  in  times  of  panic,  the  last  of  such  occasions  having 
occurred  in  1866.  The  English  currency  system  is  thus,  as  far 
as  the  law  can  rule  it,  entirely  inelastic,  but  it  has  already  been 
shown  that  even  when  the  law  of  1844  was  passed,  the  check  cur- 
rency, over  which  the  law  exercises  no  restriction,  was  already 
driving  out  the  note,  and  banks  without  any  right  of  note  issue 
had  been  11  years  established  in  London.  The  Bank  of  Eng- 
land's note  issue  is  now  chiefly  used  by  other  banks  as  '  till 
money,'  or  part  of  the  store  of  legal-tender  cash  they  keep  to 
meet  demands  on  them.  It  has  thus  become  part  of  the  basis  of 
credit  in  England,  since  the  other  banks  roughly  base  their 
operations  on  their  holding  of  cash  in  hand  and  at  the  Bank  of 
England.  Their  cash  at  the  Bank  of  England  has  already  been 
discussed  above;  their  cash  in  hand  consists  of  coin  and  notes, 
and  since  the  latter  have  thus  become  part  of  the  foundation  on 
which  the  deposit  liabilities  of  the  other  banks  are  based,  there 
is  reasonable  ground  for  the  contention  often  put  forward  by 
practical  expert  critics  of  the  English  system,  that  the  fiduciary 
note  issue  should  be  reduced  by  the  repayment  by  the  Govern- 
ment of  the  whole  or  part  of  a  Government  debt  of  £11,000,000 
to  the  Bank,  which  backs  the  greater  part  of  it,  and  its  replace- 
ment by  gold.  It  is  evident  that  the  amount  of  metallic  back- 
ing for  a  note  issue  which  is  intended  to  circulate  as  currency 
is  a  different  matter  from  that  required  in  the  case  of  a  note  issue 
which  is  held  by  bankers  as  a  reserve  and  used  by  them  as  a 
foundation  for  a  pyramid  of  credit  operations. 

"4.  By  the  ease  with  which  the  Bank  of  England  provides 
emergency  currency  it  gives  the  English  banking  system  the 
great  advantage  of  extreme  elasticity  and  adaptability;  and  it  is 
enabled  to  do  this  by  the  fact  that  it  acts  as  banker  to  the  other 
banks,  and  that  every  credit  which  they  have  in  its  books  is 
regarded  by  them  and  by  the  rest  of  the  community  as  f  cash ' 
to  be  taken  as  practically  equal  to  so  much  gold.  This  cash  at 
the  Bank  of  England  in  the  hands  of  the  rest  of  the  bankers  can 
be  multiplied  as  rapidly  as  the  Bank  of  England  is  prepared  to 
make  advances,  and  as  the  mercantile  and  financial  community 
can  bring  it  bills  for  discount  or  securities  to  be  borrowed  on. 
There  is  no  legal  restriction  of  any  sort  or  kind,  and  the  close 
relations  between  the  Bank  and  its  borrowing  customers  enable 
the  necessary  operations  to  be  carried  through  with  a  celerity 
which  is  unrivaled,  at  any  rate  in  the  Eastern  Hemisphere.  The 
process  works  as  follows :  In  every  English  bank  balance  sheet 


EMERGENCY  CURRENCY  33 

there  will  be  found  an  item  among  the  assets  'cash  at  call  or 
short  notice/  though  in  a  few  cases  the  slovenly  habit  is  adopted 
of  including  this  entry  along  with  the  cash  in  hand.  This  '  cash/ 
as  it  is  called,  really  consists  chiefly  of  loans  made  by  the  banks 
to  the  discount  houses,  and  regarded  by  the  banks  as  the  most 
liquid  of  their  resources.  As  such,  it  is  at  once  made  use  of  when 
for  any  reason,  such  as  the  many  payments  which  have  to  be 
made  on  quarter  days,  or  the  end  of  the  half  year  when  the 
preparation  of  balance  sheets  by  firms  and  companies  requires 
an  abnormal  amount  of  cash  for  more  or  less  ornamental  pur- 
poses, the  banks  are  subjected  to  extra  pressure  by  their  cus- 
tomers, who  both  withdraw  actual  currency  from  them  for  smaller 
payments,  and  require  advances  in  order  to  show  cash  with  bank- 
ers in  their  balance  sheets. 

"  The  banks  in  order  to  meet  this  pressure,  and  at  the  same 
time  to  preserve  an  adequate  amount  of  cash  in  their  own  state- 
ments, call  in  their  loans  from  the  discount  houses ;  the  discount 
houses,  at  a  point,  can  only  repay  them  by  borrowing  from  the 
Bank  of  England  and  transferring  the  credit  raised  with  it  to 
the  bankers,  whose  cash  at  the  Bank  of  England  is  thus  increased. 
This  book  entry  takes  place  in  their  balance  sheets  of  the  legal- 
tender  cash  that  their  customers  have  withdrawn,  and  is  used 
as  the  basis  for  the  increased  deposits  that  have  been  created  by 
the  loans  of  the  bankers  to  their  customers  for  ornamental  pur- 
poses. Similarly  at  the  time  of  year  when  the  transfer  of  the 
taxes  to  the  Government's  balance  reduces  the  cash  at  the  Bank 
of  England  held  by  the  other  banks  the  gap  is  filled  by  the  loans 
made  by  the  Bank  of  England  to  the  customers  of  the  other 
banks.  In  short,  by  discounting  and  making  advances  the  Bank 
of  England  can  at  any  time  create  book  credits,  which  are 
regarded  as  cash  by  the  English  banking  community,  and  on 
which  the  latter  can  base  the  credits  which  give  the  right  to 
draw  checks,  which  are  the  most  important  part  of  the  English 
currency.  The  extent  to  which  the  Bank  of  England  can  create 
this  credit  is  a  matter  for  its  own  discretion,  but  any  creation  of 
it  diminishes  the  proportion  that  it  shows  in  its  own  weekly 
returns  between  its  reserve  and  liabilities.  Consequently  when 
it  is  applied  to  for  amounts  which  bring  that  proportion  too  low 
the  Bank  of  England  has  to  take  steps  to  reinforce  its  cash 
reserve. 

"5.  It  has  been  shown  that  the  Bank  of  England  keeps  the 
balances  of  the  other  banks,  and  from  this  it  follows  that  the 
latter  look  to  it  for  gold  or  notes  at  times  when  the  local  com- 
mercial community  requires  an  extra  supply.  At  the  end  of 
every  month,  especially  at  the  ends  of  the  quarters  or  at  times 
of  national  holidays,  the  Bank's  note  circulation  expands  and 
coin  is  taken  from  it.  The  duty  is  thus  thrown  upon  it  of  keep- 
ing an  adequate  supply  of  cash  for  home  purposes,  and,  as  has 
been  already  stated,  its  normal  proportion  of  cash  to  liabilities 
is  very  much  higher  than  that  of  the  other  banks.  But  these 


34    PASSING  OF  THE  GOLD  RESERVE 

movements  are  tidal  and  regular,  and  though  times  of  active 
trade  increase  slightly  the  demand  for  coin  and  note  currency  in 
England,  the  extensive  and  ever-growing  use  of  the  check  reduces 
the  importance  of  this  part  of  the  Bank's  duties. 

"  6.  Much  more  important  is  the  Bank  of  England's  duty  as 
custodian  of  the  gold  store  for  international  banking.  London 
is  the  only  European  center  which  is  always  prepared  to  honor 
its  drafts  in  gold  immediately  and  to  any  extent.  The  Bank  of 
France  has  the  right  to  make  payments  in  silver,  and  uses  it  by 
often  charging  a  premium  on  gold,  sufficient  to  check  any  de- 
mand for  it;  and  in  other  centers  measures  are  taken  which 
make  apparently  free  convertibility  of  credit  instruments  optional 
at  the  choice  of  the  central  bank.  Consequently  the  Bank  of 
England  has  to  be  prepared  to  meet  demands  on  it  at  any  time 
from  abroad,  based  on  credits  given  to  foreigners  by  the  English 
banking  community,  and  it  has  thus  to  observe  the  signs  of 
financial  weather  in  all  parts  of  the  world  and  to  regulate  the 
price  of  money  in  London  so  that  the  exchanges  may  not  be 
allowed  to  become  or  remain  adverse  to  a  dangerous  point.  The 
difficulties  of  this  task  are  increased  by  the  extent  to  which  the 
English  banking  community  works  independently  of  it,  by 
accepting  and  discounting  finance  paper,  and  giving  foreigners 
credits  at  rates  which  encourage  their  further  creation.  For  the 
low  and  wholly  unregulated  proportion  of  cash  to  liabilities  on 
which  English  banking  works,  enables  the  other  banks  to  multi- 
ply credits  ultimately  based  on  the  Bank  of  England's  reserve, 
leaving  the  responsibility  for  maintaining  the  reserve  to  the 
Bank.  This  it  does  by  raising  its  rate  when  necessary,  and  so, 
if  it  has  control  of  the  market  and  its  rate  is  '  effective ' — a 
phrase  which  will  be  explained  later — raising  the  general  level  of 
money  rates  in  London. 

"When  its  rate  is  not  effective,  the  Bank  of  England  finds 
itself  obliged  to  intervene  in  the  outer  money  market — consisting 
of  the  other  banks  and  their  customers — and  control  the  rates 
current  in  it.  This  it  does  by  borrowing  some  of  the  floating 
funds  in  this  market,  so  lessening  their  supply  and  forcing  up 
the  price  of  money.  By  means  of  this  borrowing  it  diminishes 
the  balances  kept  with  it  by  the  other  banks,  either  directly  or 
indirectly — directly  if  it  borrows  from  them,  indirectly  if  it 
borrows  from  their  customers  who  hand  the  advance  to  it  in  the 
shape  of  a  check  on  them.  The  result  is  that  so  much  of  the 
1  cash  at  the  Bank  of  England/  which  the  English  banking  com- 
munity uses  as  part  of  its  basis  of  credit,  is  wiped  out,  money — 
which  in  London  generally  means  the  price  at  which  the  bankers 
are  prepared  to  lend  for  a  day  or  for  a  short  period  to  the  dis- 
count houses — becomes  dearer,  the  market  rate  of  discount  con- 
sequently tends  to  advance,  the  foreign  exchanges  move  in  favor 
of  London,  and  the  tide  of  gold  sets  in  the  direction  of  the  Bank 
of  England's  vaults,  and  it  is  enabled  to  replenish  its  reserve  or 
check  the  drain  on  it.  That  the  Bank  of  England  should  have 


EMEEGENCY  CURRENCY  35 

to  go  through  this  clumsy  ceremony  of  borrowing  money  that  it 
does  not  want,  in  order  to  deprive  the  outer  market  of  a  surplus 
which  depresses  discount  rates  in  a  manner  that  is  dangerous 
owing  to  its  effect  on  the  foreign  exchanges,  arises  from  the 
want  of  connection  between  bank  rate  and  market  rate.  In 
former  days  the  London  money  market  never  had  enough  money 
to  work  with  without  help  from  the  Bank  of  England.  Bagehot, 
in  his  great  work  on  Lombard  Street,  published  in  1873,  says 
that  'at  all  ordinary  moments  there  is  not  money  enough  in 
Lombard  Street  to  discount  all  the  bills  in  Lombard  Street 
without  taking  some  money  from  the  Bank  of  England/ 

"  As  long  as  this  was  so,  Bank  rate — the  price  at  which  the 
bank  would  discount  bills — was  at  all  times  an  important  influ- 
ence on  the  market  rate.  Since  then,  however,  the  business  of 
credit  making  has  been  so  quickly  and  skillfully  extended  that 
Lombard  Street  is  frequently  able  to  ignore  Bank  rate,  knowing 
that  it  will  easily  be  able  to  supply  its  needs  from  the  other 
banks,  at  rates  which  are  normally  below  it.  Currency  in  Eng- 
land consists  of  checks  drawn  against  deposits  which  are  largely 
created  by  the  loans  and  discounts  of  the  other  banks.  There 
is  no  legal  limit  whatever  on  the  extent  to  which  these  loans 
and  discounts  can  be  multiplied,  and  the  only  limits  imposed  are 
those  of  publicity,  which  is  applied  rarely  in  all  cases  and  in 
some  not  at  all,  and  of  the  prudence  with  which  the  banks  con- 
duct their  business.  Hence  it  follows  that  competition  between 
the  banks  often  impels  them  to  continue  to  make  advances  or 
discount  bills  at  low  rates  when  the  Bank  of  England,  as  cus- 
todian of  the  English  gold  reserve,  thinks  it  advisable  in  the 
interests  of  the  foreign  exchanges  to  impose  a  higher  level.  This 
it  does  by  borrowing  some  of  the  credit  manufactured  by  the 
other  banks,  in  order  to  create  artificial  scarcity  of  money,  and 
make  its  own  official  rate  effective. 

"  It  thus  appears  that  the  Bank  of  England's  official  rate  is 
often  through  long  periods  a  mere  empty  symbol,  bearing  no 
actual  relation  to  the  real  price  of  money  in  London;  and  only 
becomes  effective,  and  a  factor  in  the  monetary  position  (1) 
when  the  trade  demand  for  credit  is  keen  enough  to  tax  the 
credit-making  facilities  of  the  other  banks  to  their  full  extent, 
(2)  when  the  payment  of  taxes  transfers  large  sums  from  the 
other  banks  to  the  Government's  account  at  the  Bank  of  England, 
so  reducing  the  '  cash  at  the  Bank  *  on  which  they  build  credit 
operations,  and  (3)  when,  owing  to  foreign  demands  for  gold, 
the  Bank  of  England  takes  measures,  by  borrowing,  to  restrict 
credits  in  the  open  market  and  to  make  its  rate  effective.  In 
other  respects  its  official  rate  differs  materially  from  the  rates 
quoted  by  ordinary  dealers  in  credit.  It  does  not  fluctuate 
according  to  the  supply  and  demand  for  bills,  but  is  regularly 
fixed  once  a  week  at  the  meetings  of  the  Bank  of  England  court 
on  Thursday  morning.  It  is  extremely  rare  for  any  change  to 
be  made  in  the  Bank  of  England  rate  on  any  day  except  Thurs- 


36    PASSING  OF  THE  GOLD  RESERVE 

day.  Instances  occur  rarely  when  some  sudden  change  of  posi- 
tion makes  it  essential,  as  at  the  end  of  1906,  when  the  Bank 
rate  was  raised  to  6  per  cent  on  a  Friday  morning.  In  normal 
times  the  rate  which  is  fixed  on  one  Thursday  is  maintained 
until  the  next,  though  the  rate  is  only  a  minimum  and  the  Bank 
of  England  occasionally  takes  advantage  of  this  fact  and  refuses 
to  discount  at  its  minimum,  which  still  remains  ostensibly  the 
Bank  rate,  while  the  bank  actually  makes  a  rather  higher  charge, 
which  is  usually  made  the  official  rate  on  the  next  Thursday. 

"But  it  must  not  be  supposed  that  when  Bank  rate  is  in- 
effective the  Bank  of  England  is  doing  no  business.  It  discounts 
bills  and  makes  advances  at  market  rates  at  its  branches,  and 
also  at  its  head  office  to  its  private  customers.  Bank  rate  may 
be  described  as  the  price  at  which  the  Bank  is  prepared  to  dis- 
count in  its  official  capacity  as  center  of  the  London  market,  and 
it  is  because  appeal  is  only  made  in  exceptional  circumstances  to 
the  Bank  to  provide  credit  in  this  capacity  that  Bank  rate  is 
often  ineffective. 

"  Finally,  the  position  of  the  Bank  of  England,  and  its  rela- 
tion to  the  English  money  market,  as  a  local  and  insular  affair, 
may  be  summed  up  by  saying  that  the  Bank,  by  means  of  the 
prestige  which  makes  a  credit  in  its  books  as  good  as  gold  enables 
the  banking  community  to  expand  credits  and  make  check  cur- 
rency as  long  as  it  is  prepared  to  lend  credit.  And  the  extent  to 
which  -it  is  prepared  to  lend  credit  is  only  regulated  by  its  own 
discretion  and  consideration  for  the  proportion  between  its  cash 
and  liabilities.  At  the  end  of  the  half  year  it  is  sometimes 
applied  to  for  fresh  credits  to  the  extent  of  over  twenty  millions 
sterling,  chiefly  in  the  form  of  advances  for  a  few  days.  On  one 
side  of  its  account  its  holding  of  securities  is  expanded  by  this 
amount  and  on  the  other  its  liability  on  deposits  is  similarly 
swollen.  At  the  end  of  1902,  the  last  occasion  when  the  Bank's 
weekly  return  was  made  up  on  December  31,  and  so  showed  the 
full  extent  of  the  extra  credit  provided  by  it  at  the  end  of  the 
year,  the  other  securities1  rose  from  £27,647,000  on  December 
17  to  £47,736,000  on  December  31.  The  other  deposits2  at  the 
same  time  rose  from  £36,653,000  to  £55,259,000,  and  this  in- 
crease in  the  basis  of  credit  was  perhaps  used  by  the  other  banks 
for  the  provision  of  five  to  ten  times  as  much  accommodation 
for  their  customers.  A  week  later  the  other  securities  had  de- 
clined to  £29,625,000  and  the  other  deposits  to  £41,073,000, 
though  reinforced  in  the  meantime  by  the  payment  of  govern- 
ment dividends ;  the  emergency  credit  had  been  wiped  out,  when 
no  longer  required,  by  the  simple  process  of  repayment  to  the 

1  Other  securities  in  the  Bank  of  England's  return,  which  is  ex- 
plained in  detail  later,  are  securities  other  than  British  Government 
obligations. 

*  Other  deposits  are  deposits  other  than  those  of  the  British  Gov- 
ernment. 


EMERGENCY  CURRENCY  37 

Bank  of  England  of  the  sums  borrowed  from  it ;  and  the  Bank's 
proportion  of  cash  to  liabilities,  which  had  fallen  to  28  per  cent 
on  December  31,  had  risen  to  38|  per  cent. 

"  Money  in  England  is  thus  to  a  great  extent  a  convention 
based  on  the  assumption  by  the  community  that  a  credit  in  the 
Bank  of  England's  books  is  as  good  as  gold.  This  assumption 
the  Bank  cultivates  by  means  of  the  high  proportion  of  cash  that 
it  keeps  in  normal  times.  At  the  end  of  the  year  it  allows  it, 
as  has  been  shown,  to  run  down  rapidly,  knowing  that  the  de- 
mand on  it  at  that  period  is  short  lived  and  is  chiefly  on  account 
of  borrowers  who  will  leave  the  sums  borrowed  to  their  credit 
in  its  books;  but  at  other  times  its  cash  proportion  is  carefully 
controlled  by  movements  in  its  official  rate  and  the  measures 
described  above. 

"  The  problem  of  providing  emergency  credit  and  currency 
capable  of  easy  expansion  and  rapid  contraction  is  thus  solved 
by  means  of  this  convention,  backed  by  the  use  of  the  check 
currency  which  cancels  itself  day  by  day,  each  check  existing 
only  for  the  purpose  of  the  transaction  which  it  completes. 

"At  the  same  time  the  Bank  of  England  is  obliged  by  the 
pressure  of  external  conditions  frequently  to  regulate  the  price 
of  money  in  London.  This  necessity  for  regulation  is  a  fact 
which  is  only  dimly  grasped  by  the  London  money  market  as  a 
whole,  which  frequently  resents  the  operations  of  the  Bank  of 
England  and  contends  that  the  price  of  money  ought  to  be  left 
to  the  natural  laws  of  supply  and  demand.  The  position  of  the 
London  money  market,  however,  as  the  only  one  in  which  gold 
can  at  all  times  be  obtained,  to  any  extent  and  without  question, 
clearly  makes  some  regulation  of  the  rates  at  which  it  is  prepared 
to  work  inevitable.  None  of  the  various  items  which  compose 
the  market  can  be  expected  to  conduct  their  business  with  a  view 
to  the  necessities  of  the  market  as  a  whole.  If  a  banker  wants  to 
increase  his  holding  of  bills,  he  naturally  does  so  at  the  market 
rate,  without  considering  whether  his  doing  so  is  likely  to  turn 
the  foreign  exchanges  against  London  and  so  cause  a  demand 
on  London  for  gold.  Consequently  the  exigencies  of  their  daily 
business,  and  the  strong  competition  between  them,  impel  the 
banks  and  discount  houses  to  do  business  at  rates  which  may 
sometimes  be  dangerous  to  the  general  interest,  and  it  is  thus 
clearly  necessary  that  some  institution  with  a  commanding  posi- 
tion at  the  head  of  the  machine  should  occasionally  intervene 
and  regulate  its  operations." 

Bills  of  exchange  may  be  of  various  kinds  as  will 
be  observed  from  the  following  statement  (Report 
of  the  National  Monetary  Commission  of  the  United 
States,  paper  by  Hartley  Withers),  heretofore  re- 
ferred to : 


38    PASSING  OF  THE  GOLD  RESERVE 
The  Merchant  Bankers  and  Accepting  Houses 

"  The  most  important  function  of  the  merchant  bankers  is 
not  that  of  banking,  but  of  accepting.  Banking,  in  the  strict 
sense  of  the  term,  they  do  not  engage  in — that  is  to  say,  they  are 
not  prepared  to  meet  claims  upon  them  by  an  immediate  pay- 
ment of  cash  or  legal  tender  over  the  counter,  but  by  payment  of 
a  check  on  one  of  the  banks  in  the  stricter  sense  of  the  term. 
Their  function  is  that  of  bringing  into  being  the  interesting 
and  important  credit  instruments  known  as  bills  of  exchange. 
A  bill  of  exchange,  originally  drawn  on  a  merchant  by  a  corre- 
spondent, from  whom  he  had  bought  goods,  directing  him  to  pay 
the  consideration  for  them  at  sight  or  at  date  named,  has  in 
recent  years  widely  extended  this  function  and  has  become  an 
instrument  by  which  credit  can  be  raised  against  any  form  of 
security  or  collateral,  or  in  some  cases  against  no  security  at  all 
but  the  credit  of  the  parties  named  upon  it. 

"  It  need  hardly  be  said  that  there  is  an  immeasurable  differ- 
ence between  one  bill  of  exchange  and  another.  Since  the  bill 
is  an  order  by  one  party  to  another  to  pay  a  sum  of  money, 
generally  at  a  subsequent  date,  the  ability  of  the  party  on  whom 
the  bill  is  drawn  to  meet  it  at  the  due  date  is  a  question  of  over- 
whelming importance.  When  the  bill  arrives  the  party  drawn 
on  '  accepts '  it  by  signing  his  name  across  the  front  of  it,  so 
intimating  that  he  is  liable  to  pay  the  sum  named  at  the  date 
specified,  and  becoming  the  acceptor  of  the  bill.  It  is  clear  that 
a  bill  accepted  by  a  small  tradesman  has  no  value  outside  his 
own  street,  if  there,  while  one  accepted  by  a  great  merchant  house 
of  unquestioned  standing  is  an  easily  negotiable  credit  instru- 
ment and  also  an  ideal  form  of  investment  for  bankers  and  others 
who  have  to  keep  their  resources  liquid,  since  it  can  easily  be 
discounted  or  turned  into  as  much  immediate  cash  as  its  pros- 
pective value  at  the  due  date  makes  it  fetch,  and  at  maturity 
it  has  to  be  met  by  its  acceptor.  The  importance  of  the  acceptor's 
name  on  a  bill  thus  led  merchants  of  first-rate  standing  to 
specialize  in  this  form  of  business.  They  gradually  left  off  or 
reduced  the  amount  of  their  actual  mercantile  business  and  con- 
fined themselves  to  accepting  bills,  for  a  commission,  for  others 
whose  credit  was  less  well  established.  Out  of  bills  of  exchange, 
originally  drawn  against  merchandise  actually  shipped,  grew  the 
finance  bill  drawn  sometimes  in  anticipation  of  produce  or 
merchandise  to  be  shipped,  sometimes  against  securities,  and 
sometimes  against  the  credit  of  the  parties  to  it. 

"  The  business  of  acceptance  has  thus  grown  up  as  an  im- 
portant and  separate  function  which  is  largely  in  the  hands  of 
the  leaders  among  the  old  merchant  firms,  whose  acceptance  of  a 
bill  stamps  it  at  once  as  a  readily  negotiable  instrument.  By 
the  service  that  they  perform  in  the  creation  of  this  great  mass  of 
paper,  the  merchant  firms,  or  accepting  houses,  as  they  are  gen- 
erally called,  facilitate  the  trade  of  the  world  in  a  most  useful 


EMERGENCY  CURRENCY  39 

and  in  fact  indispensable  fashion  by  providing  credits  against 
mercantile  transactions  which  have  not  yet  matured.  When  the 
wheat  of  America  is  harvested,  but  has  not  yet  reached  its 
market,  the  ultimate  purchaser  of  it  cannot  be  expected  to  pay 
for  it  in  cash,  but  arrangements  can  be  made  by  which  a  bill  can 
be  drawn  against  it  on  a  first-class  accepting  house,  and  this 
bill  being  readily  negotiable  and  easily  discounted  in  the  London 
market  provides  the  cash,  or  a  considerable  proportion  of  it, 
which  the  wheat  will  ultimately  realize  when  it  has  been  shipped 
to  its  destination  and  passed  into  the  hands  of  the  consumer. 
The  same  process  can  be  repeated  with  many  articles  of  manu- 
facture which  are  still  in  an  inchoate  condition,  and  the  world's 
commercial  activity,  which  would  be  immeasurably  lessened  if 
each  transaction  had  to  wait  maturity  before  cash  could  be 
raised  against  it,  is  thus  enabled  to  proceed  with  the  remarkable 
velocity  which  modern  conditions  make  possible.  Nevertheless 
the  function  of  the  London  accepting  houses,  though  of  enormous 
importance,  is  still  to  a  certain  extent  subordinate  to  the  judg- 
ment of  the  English  banks.  They  finally  decide  whose  paper  is 
most  readily  negotiable,  and,  in  times  when  the  credit  machine 
is  felt  to  be  somewhat  out  of  gear,  the  bankers  occasionally  dis- 
criminate against  the  paper  of  firms  which  they  consider  to  have 
been  giving  their  acceptance  too  freely.  In  this  respect,  as  in  so 
many  others,  the  Bank  of  England  remains  the  final  arbiter, 
since  the  paper  of  an  accepting  house  which  is  questioned  by  the 
other  banks  can  be  negotiated  at  the  Bank  of  England  through 
a  discount  house,  and  the  Bank  of  England  has  before  now 
intervened  with  effect  when  it  considered  that  questions  raised 
concerning  certain  acceptances  have  been  without  justification. 

"  This  business  of  acceptance  is  one  into  which  the  other 
banks  have  themselves  recently  intruded  with  considerable  effect, 
accepting  bills  for  their  customers,  home  and  foreign,  for  a 
commission;  and  there  is  a  certain  apparent  anomaly  in  the 
position  which  makes  them  guardians  of  the  volume  of  accept- 
ance created  by  the  private  firms  and  acceptors  themselves  on  a 
steadily  increasing  scale.  Nevertheless,  this  anomaly  has  little 
or  no  untoward  effect  in  practice.  The  bankers  are  naturally 
extremely  cautious  in  raising  any  question  as  to  the  security  of 
general  credit  in  London,  and  they  are  in  many  ways  closely 
connected  with  the  private  accepting  houses,  so  that  the  system, 
which  appears  to  be  full  of  uncomfortable  possibilities  on  paper, 
works  easily  enough  in  practice. 

"  Other  functions  of  the  merchant  firms  and  accepting  houses 
are  their  activity  in  general  finance  and  in  exchange  business. 
Both  these  functions  arise  out  of  their  old  business  as  merchants, 
which  gave  them  close  connection  both  with  the  governments 
and  the  business  communities  of  foreign  countries.  Their  con- 
nection with  the  governments  naturally  led  to  their  providing 
credit  facilities  for  them,  and  to  their  handling  loans  and  other 
operations  which  these  governments  might  have  to  conduct  in 


40    PASSING  OF  THE  GOLD  RESERVE 

the  London  market.  Many  of  them  act  as  regular  agents  of 
foreign  governments,  making  issues  of  bonds  on  their  behalf, 
paying  their  coupons,  and  conducting  amortization  and  other 
business  in  connection  with  their  loans;  and  their  connection 
with  the  general  business  community  inevitably  led  to  their  doing 
a  considerable  exchange  business  with  foreign  countries,  financ- 
ing drafts  on  them  for  the  purposes  of  travel  and  the  innumerable 
other  arrangements  which  necessitate  the  transfer  of  credit  from 
one  country  to  another.  It  should  perhaps  be  added  that  the 
Bank  of  England's  court  of  directors  is  largely  recruited  from 
the  ranks  of  the  accepting  firms  and  finance  houses,  and  the 
close  connection  of  these  firms  with  the  finance,  both  govern- 
ment and  private,  of  other  countries,  equips  them  especially  well 
to  regulate  the  policy  of  the  Bank  of  England,  one  of  whose 
most  important  functions,  as  we  have  already  seen,  consists  in 
controlling  the  London  money  market  with  a  view  to  foreign 
demands  upon  its  store  of  cash/' 

Under  the  banking  systems  of  France,  Germany 
and  Switzerland  provisions  similar  to  those  existing 
in  England  are  made  for  the  issue  of  bank  notes  by 
semi-governmental  banking  institutions  operating 
under  governmental  supervision  and  control. 

Thus  under  the  French  system  the  Bank  of 
France  may  issue  bank  notes  against  the  rediscount 
of  commercial  bills  of  exchange  maturing  in  not 
more  than  three  months  and  having  at  least  three 
responsible  endorsers  thereto. 

Under  the  German  System  the  Imperial  Bank  of 
Germany  may  issue  bank  notes  against  discounted 
commercial  bills  of  exchange,  maturing  within 
three  months,  having  three  endorsers  and  in  excep- 
tional cases  two  solvent  endorsers  thereto. 

Under  the  laws  of  Switzerland  the  National  Bank 
of  Switzerland  may  issue  bank  notes  against  dis- 
counted bills  of  exchange  having  at  least  two  sig- 
natures thereto  and  maturing  in  not  more  than 
three  months.  A  like  course  is  pursued  under  the 
Federal  Reserve  System  recently  established  in  the 
United  States. 


EMERGENCY  CURRENCY  41 

While  we  have  thus  observed  that  provision  has 
been  made  in  the  various  countries  for  the  issue  of 
bank  notes  with  full  legal  tender  qualities,  it  is  by 
no  means  to  be  inferred  that  such  issues  in  all  the 
countries  mentioned,  constitute  in  fact  an  "  Emer- 
gency Currency  "  in  the  fullest  adaptation  of  that 
term  to  the  full  extent  of  such  issues. 

Referring  to  the  foregoing  description  of  the 
operations  of  the  Bank  of  England  it  will  be  noticed 
that  bank  notes  may  be  issued  by  that  institution 
to  the  extent  of  £18,450,000  without  requiring  the 
maintenance  of  a  gold  reserve  to  support  the  same, 
and  that  for  issues  beyond  that  sum  a  gold  reserve 
of  100  per  cent  in  volume  must  be  maintained.  As 
the  issues  up  to  £18,450,000  constitute  therefore  new 
and  additional  currency  they  may  be  properly  con- 
sidered as  constituting  an  "Emergency  Currency  " 
and  that  for  issues  beyond  that  sum  they  do  not  con- 
stitute such  a  currency,  for  the  reason  that  the 
bank  notes  so  issued  are  merely  a  substitution  of 
one  form  of  currency  for  another  (gold)  already 
existing  and  of  full  legal  tender  value. 

A  similar  state  of  affairs  exists  under  the  French, 
German  and  Swiss  systems.  Thus  under  the 
French  system  a  gold  reserve  of  50  per  cent  to  100 
per  cent  is  maintained  against  note  issues  by  the 
Bank  of  France.  Under  the  German  system  a  gold 
reserve  of  334  per  cent  is  required  by  law  to  be 
maintained  against  bank  notes  issued  by  the  Im- 
perial Bank  of  Germany.  Under  the  Swiss  system 
a  reserve  of  not  less  than  40  per  cent  in  gold  and 
60  per  cent  in  bills  of  exchange  is  required  against 
note  issues  by  the  National  Bank  of  Switzerland.  It 
is  therefore  evident  that  to  the  extent  that  bank 
notes  are  issued  under  these  various  systems  with- 
out the  requirement  of  a  gold  reserve  they  consti- 


42     PASSING  OF  THE  GOLD  RESERVE 

tute  an  "Emergency  Currency  "  within  the  meaning 
of  that  term  as  herein  defined,  and  that  for  issues 
beyond  that  amount  they  do  not  constitute  an 
"  Emergency  Currency  "  in  fact,  as  they  are  merely 
the  substitution  of  one  form  of  money  for  another 
already  existing  as  heretofore  stated. 

These  observations  therefore  lead  us  to  the  con- 
clusion that  there  is  no  well  established,  uniform 
rule  of  action,  either  governmental  or  scientific, 
underlying  these  various  systems.  They  appear 
rather  to  be  the  outgrowth  of  the  commercial,  bank- 
ing, and  political  development  peculiar  to  each  of 
the  respective  countries.  Having  no  gold  in  our 
modern  country  we  are  unable  therefore  to  adopt 
any  one  of  the  foregoing  systems  in  so  far  as  they 
provide  for  the  issue  of  Emergency  Currency  se- 
cured either  wholly  or  in  part  by  a  "  Gold  Reserve, ' ' 
and  that  very  naturally  leads  us  to  the  consideration 
of  what  constitutes  the  next  best  security  that  may 
be  accepted  for  that  purpose. 

It  is  an  inexorable  rule  underlying  all  issues  of 
paper  currency,  whether  in  the  form  of  "  legal  ten- 
der Treasury  notes  "  issued  by  the  National  Gov- 
ernment, or  in  the  form  of  "  bank  notes  "  issued  by 
banking  institutions  operating  with  or  without  gov- 
ernmental supervision  or  control,  that  the  value  of 
such  issues  must  be  measured  entirely  by  the  facility 
and  certainty  with  which  they  may  be  redeemed. 

As  to  legal  tender  Treasury  notes  we  have  ob- 
served that  those  issued  by  the  Government  of  the 
United  States  during  the  Civil  War,  1861-1865, 
failed  to  command  public  confidence  as  they  were 
not  a  legal  tender  in  payment  for  customs  duties 
and  were  receivable  by  the  Government  only  in 
payment  for  internal  revenue  taxes  and  other  minor 
obligations  forming  but  a  small  part  of  the  Gov- 


EMERGENCY  CURRENCY  43 

eminent 's  revenue;  thus  leaving  outstanding  con- 
siderable quantities  of  legal  tender  notes  for  the 
redemption  of  which  no  provision  was  made  until 
on  and  after  January  1,  1879.  (Chapter  I.) 

As  to  "  bank  notes  "  the  experience  has  been 
the  same,  the  value  of  such  notes  being  dependent 
entirely  upon  the  soundness  of  the  institutions  is- 
suing them  and  the  facility  with  which  they  could 
be  redeemed. 

As  to  legal  tender  Treasury  notes  we  have  demon- 
strated that  if  issued  in  reasonable  amounts,  not  to 
exceed  the  total  revenue  for  the  year,  and  made  a 
full  legal  tender  in  payment  of  all  public  dues 
whether  customs  duties,  internal  revenue  taxes  or 
otherwise,  such  notes  will  be  automatically  retired 
when  paid  into  the  National  Treasury  and  none  will 
be  outstanding  at  the  end  of  the  year.  (  Chapter  I. ) 
A  certain  and  total  redemption  of  such  notes  is  thus 
provided  for. 

As  to  bank  notes  we  have  observed  that  under  the 
laws  of  the  various  European  countries  the  prompt 
redemption  of  such  notes  issued  by  banking  insti- 
tutions operating  under  Governmental  supervi- 
sion, is  provided  for  by  keeping  on  hand  a  gold 
reserve  supported,  wholly  or  in  part,  by  commercial 
bills  of  exchange  maturing  within  90  days  or  less. 

As  has  been  heretofore  indicated  in  the  discussion 
of  the  English  banking  system, 

"  A  bill  of  exchange  originally  drawn  on  a  merchant  by  a 
correspondent,  from  whom  he  had  bought  goods,  directing  him 
to  pay  the  consideration  for  them  at  sight,  or  at  a  date  named, 
has  in  recent  years  widely  extended  this  function  and  has  become 
an  instrument  by  which  credit  can  be  raised  against  any  form 
of  security  or  collateral,  or  in  some  cases  against  no  security  at 
all  but  the  credit  of  the  parties  named  upon  it." 

In  view  of  this  great  divergence  as  to  the  intrinsic 
nature  of  bills  of  exchange,  those  growing  out  of 


44    PASSING  OF  THE  GOLD  RESERVE 

actual  commercial  transactions,  that  is,  "  those 
drawn  to  secure  the  payment  of  goods  actually  mov- 
ing in  commerce/'  are  considered,  next  to  gold,  the 
most  acceptable  form  of  security  to  be  held  by 
banking  institutions  as  security  against  bank 
notes  outstanding.  Bills  of  exchange  of  this  kind 
are  self -liquidating  as  they  represent  commodities 
passing  in  commerce  somewhere  between  the  origi- 
nal producer  or  manufacturer  and  the  final  pur- 
chaser and  consumer  and  are  reasonably  certain 
to  be  taken  up  and  paid  at  maturity,  particularly 
so  if  the  producer,  purchaser  and  intervening  bank- 
ers have  all  assumed  a  responsibility  on  the  paper 
for  its  payment  by  the  endorsement  thereof.  As 
such  bills  constitute  for  banking  purposes  the  next 
best  security  to  that  of  gold,  we  may  therefore  in 
the  absence  of  gold  consider  them  as  the  next  best 
basis  for  the  formation  of  the  reserve  against 
"  Emergency  Bank  Note  Currency." 

With  this  object  in  view  two  methods  of  pro- 
cedures suggest  themselves : 

First:  To  provide  for  the  issue  of  such  Emergency 
Currency  through  the  National  Treasury 
direct  upon  the  deposit  of  bills  of  exchange 
of  the  desired  quality,  without  the  interven- 
tion of  any  central,  or  semi-Governmental 
banking  institution  whatsoever. 

Second:  To  provide  for  the  issue  of  Emergency 
Currency  solely  through  a  central,  or  semi- 
governmental  banking  institution,  or  system 
operating  as  a  bank  of  deposit  and  discount, 
along  lines  similar  to  those  followed  by  the 
Bank  of  England,  the  Bank  of  France,  the 
Imperial  Bank  of  Germany,  the  Bank  of 
Switzerland  and  the  Federal  Reserve  Sys- 
tem of  the  United  States. 


EMERGENCY  CURRENCY  45 

If  the  issue  is  made  through  the  National  Treas- 
ury the  Government  necessarily  becomes  sponsor 
for  the  soundness  of  the  emergency  currency  so 
issued  and  must  see  to  it  that  only  high-class  self- 
liquidating  commercial  bills  of  exchange  of  the 
character  herein  specified  are  deposited,  and  that 
they  are  promptly  taken  up  at  or  before  maturity 
and  the  emergency  currency  issued  thereon  retired. 

If  the  issue  is  made  through  a  central,  or  semi- 
governmental  banking  institution,  the  burden  of 
safeguarding  such  issues,  and  providing  for  the 
retirement  and  cancellation  of  the  emergency  cur- 
rency issued  thereon  necessarily  rests  upon  that 
institution.  In  either  case  this  leads  us  to  the 
consideration  of  the  question.  "  Can  Emergency 
Currency  be  so  issued  without  requiring  the  sup- 
port of  a  "Gold  Reserve  "? 


CHAPTER  V 

THE  GOLD  RESERVE 

It  has  been  shown  in  the  foregoing  pages,  that 
under  the  banking  systems  of  various  European 
countries,  bank  notes  with  full  legal  tender  qualities 
may  be  issued : 

First:  Against  a  reserve  of  an  equal  amount  in 
gold.  As  in  the  case  of  England  for  issues 
beyond  £18,450,000. 

Second:  Against  a  reserve  of  both  gold  and  com- 
mercial bills  of  exchange  in  varying  propor- 
tions. As  in  the  case  of  France,  Germany 
and  Switzerland,  and  the  United  States. 

Third:  Against  a  reserve  of  bills  of  exchange,  with- 
out an  additional  support  of  gold.  As  in  the 
case  of  England  where  such  notes  may  be 
issued  to  the  extent  of  £18,450,000  without 
the  requirement  of  a  gold  reserve. 

We  have  heretofore  demonstrated  in  Chapter  I 
of  this  volume  under  the  heading  "  Financing  the 
Government  "  that  full  "  legal  tender  Treasury 
Notes  "  may  be  safely  issued  without  requiring  the 
support  of  a  Gold  Reserve,  where  such  issues  do  not 
exceed  the  prospective  public  revenues  for  the  fiscal 
year,  for  the  reason  that  the  total  redemption  and 
cancellation  of  such  issues  is  always  in  open  view 
and  is  therefore  fully  assured.  It  has  also  been 
stated  in  the  preceding  chapter  that  "  It  is  an  inex- 
orable rule  underlying  all  issues  of  paper  currency, 
whether  in  the  form  of  "  legal  tender  Treasury 
Notes  "  issued  by  the  national  government,  or  in 
the  form  of  "  bank  notes  "  issued  by  banking  insti- 
tutions operating  with,  or  without  governmental 

46 


THE  GOLD  EESERVB  47 

supervision  or  control,  that  the  value  of  such  issues 
must  be  measured  entirely  by  the  facility  and  cer- 
tainty with  which  they  may  be  redeemed. ' ' 

Applying  this  rule  to  the  first  proposition  just 
mentioned,  we  find  that  where  bank  notes  are  issued 
against  an  equal  amount  (100  per  cent)  in  gold, 
absolute  certainty  of  redemption  is  assured. 

As  to  the  second  proposition  we  find  that  where 
bank  notes  are  issued  against  a  reserve  of  both  gold 
and  commercial  bills  of  exchange  in  varying  pro- 
portions, that  there  is  a  reasonable  certainty  of  re- 
demption provided  the  bank  notes  so  issued  are 
supported  in  fact  to  the  full  face  value  thereof 
(100  per  cent)  by  commercial  bills  of  exchange  of 
good  quality  maturing  in  three  months  or  less,  and 
endorsed  by  at  least  two  or  three  responsible  parties 
to  the  transaction,  and  that  therefore  the  additional 
reserve  in  gold  of  whatever  percentage  is  merely 
an  additional  assurance  that  any  losses  growing 
out  of  the  acceptance  and  rediscount  of  bills  of  ex- 
change of  poor  quality  will  be  made  good  from 
such  "  gold  reserve  "  which  may  in  fact  constitute 
a  part  of  the  "  paid  in  capital  "  of  the  bank  issuing 
such  notes. 

Thus  it  is  stated  by  French  writers  that : 

"  The  reason  why  the  Bank  of  France  requires  capital  is  that 
it  is  impossible  to  secure  an  absolutely  infallible  discount  board 
and  to  discount  only  paper  that  is  absolutely  safe."  (Eeport 
of  the  National  Monetary  Commission  of  the  United  States  on 
the  operations  of  the  Bank  of  France.)  (Senate  Document  No. 
494,  61st  Congress,  2d  Session.) 

As  to  the  third  proposition  we  find  that  where 
bank  notes  are  issued  against  a  reserve  of  com- 
mercial bills  of  exchange  without  the  additional 
support  of  a  fixed  gold  reserve,  that  there  is  like- 
wise a  reasonable  certainty  of  redemption,  as  the 
mere  absence  of  a  fixed  gold  reserve  does  not  neces- 
sarily detract  from  this  reasonable  certainty  if  we 


48    PASSING  OF  THE  GOLD  RESERVE 

bear  in  mind  that  any  losses  that  may  be  sustained 
through  the  rediscount  of  poor  bills  of  exchange 
must  in  the  last  analysis  be  met  from  the  "  paid  in 
capital  stock  and  surplus  "  of  the  issuing  bank,  be 
that  gold  or  paper  currency. 

As  our  modern  country  has  no  gold  it  follows  that 
there  can  be  no  "gold  reserve  "  to  support  emer- 
gency bank  notes  issued  by  semi-governmental 
banking  institutions  on  the  rediscount  of  commer- 
cial bills  of  exchange,  but  that  additional  certainty 
of  redemption  can  be  provided  for  by  the  retention 
of  its  equivalent,  a  reserve  of  "  legal  tender  Treas- 
ury Notes/'  forming  part  of  the  paid  in  capital 
stock  and  surplus  of  such  institutions. 

Should  the  alternative  plan  be  followed  of  issu- 
ing emergency  currency  only  through  the  National 
Treasury  on  the  deposit  and  rediscount  of  commer- 
cial bills  of  exchange  of  the  highest  quality,  reason- 
able certainty  of  redemption  may  be  also  assured, 
if  we  bear  in  mind  that  the  several  commercial 
banking  institutions  in  depositing  such  bills  of  ex- 
change with  the  National  Treasury  will  have  as- 
sumed full  responsibility  for  the  soundness  thereof, 
and  that  in  case  of  default  any  loss  must,  as  a  mat- 
ter of  fact,  be  made  good  from  the  paid  in  capital 
and  surplus  of  such  institutions.  To  that  extent 
therefore  the  paid  in  capital  and  surplus  of  such 
commercial  banking  institutions  constitutes  in  fact 
a  reserve  against  any  emergency  currency  that  may 
have  been  so  issued,  from  which  it  is  evident  that 
the  National  Treasury  is  placed  under  no  necessity 
for  carrying  a  further  and  separate  reserve  of  legal 
tender  Treasury  notes  or  of  gold  for  that  purpose. 

It  follows  therefore  that  the  closing  query  of  the 
preceding  chapter  "  Can  emergency  currency  be 
so  issued  without  requiring  the  support  of  a  gold 
reserve  ' '  must  be  answered  in  the  affirmative. 


CHAPTER  VI 
BALANCE  OF  TRADE 

Having  thus  witnessed  the  gradual  development 
of  our  modern  community  into  a  country  of  wide 
agricultural,  industrial  and  commercial  activities  it 
is  reasonable  to  assume  that  it  may  now  be  ready  to 
look  beyond  with  a  view  to  opening  up  commerce 
with  foreign  nations.  In  the  ordinary  course  of 
events  this  will  undoubtedly  lead  to  the  purchase  of 
such  goods  the  product  of  the  soil  and  industry  of 
foreign  countries  as  may  be  necessary  and  desir- 
able for  the  use  and  comfort  of  the  people  of  our 
modern  nation,  and  in  return  to  the  sale  and  ship- 
ment abroad  of  such  of  the  products  of  the  soil 
and  industry  of  their  country  as  may  be  necessary 
and  desirable  for  the  use  and  comfort  of  the  people 
of  foreign  countries. 

It  is  of  course  self-evident  that  goods  purchased 
abroad  must  be  paid  for.  This  may  be  accom- 
plished : 

First:  Through  the  exchange  and  shipment 
abroad  of  goods  the  product  of  the  soil  and 
industry  of  the  purchasing  country. 

Second:  By  the  shipment  abroad  of  recognized, 
marketable  bonds  and  stock  exchange  se- 
curities. 

Third:  By  the  payment  of  actual  money. 

Assuming  therefore  that  after  the  fullest  interna- 
tional exchange  of  commodities  in  the  course  of 
commerce  it  should  develop  that  the  "Balance  of 

49 


50    PASSING  OF  THE  GOLD  RESERVE 

Trade  "  is  in  favor  of  our  "  modern  country  "  and 
that  the  recognized  and  established  money  of  ac- 
count and  standard  of  value  of  the  foreign  debtor 
nations  is  gold,  it  necessarily  follows  that  the  bal- 
ance so  due  will  be  paid  in  gold. 

Gold,  as  is  well  known,  is  the  recognized  standard 
of  value  governing  foreign  exchanges  of  the  leading 
commercial  nations,  and  although  we  have  not  here- 
tofore, in  following  the  progress  and  development 
of  our  modern  nation,  made  provision  for  a  gold 
standard,  it  is  self-evident  that  the  legal  tender 
Treasury  Notes  provided  for  must  be  based  upon 
some  standard  of  value.  As  our  modern  country 
forms  but  one  of  a  number  of  nations  on  the  face 
of  the  globe  the  usual  procedure  in  such  cases  would 
be  to  adopt  the  standard  of  value  in  use  in  the 
mother  country,  or  that  of  a  neighboring,  or  other 
country,  with  which  commercial  intercourse  is  to  be 
looked  forward  to.  It  is  therefore  immaterial  for 
our  present  purpose  whether  the  standard  is  that 
of  the  American  gold  dollar,  the  British  pound 
Sterling,  the  franc  of  the  Latin  Union,  the  mark 
of  Germany,  the  pesata  of  Spain,  the  peso  of  Ar- 
gentine, or  that  of  other  countries  having  the  gold 
standard. 

Should  our  modern  country  therefore  in  conse- 
quence of  a  favorable  balance  of  trade  become  the 
holder  of  considerable  quantities  of  gold,  the  ques- 
tion immediately  arises  as  to  what  disposition  shall 
be  made  thereof. 

First:  Shall  it  be  coined  into  standard  gold  coins  of 
the  fineness  and  weight  represented  by  the 
legal  tender  Treasury  Notes  heretofore  pro- 
vided for,  and  a  corresponding  amount  of 
legal  tender  Treasury  Notes  canceled  ? 


BALANCE  OF  TRADE  51 

Second:  Shall  it  be  coined  into  standard  gold  coins 
of  the  fineness  and  weight  represented  by  the 
legal  tender  Treasury  Notes  heretofore  pro- 
vided for,  without  canceling  a  corresponding 
amount  of  legal  tender  Treasury  Notes,  with 
authority  to  issue  against  the  same  gold  cer- 
tificates of  a  corresponding  amount  ? 

Third:  Shall  it  be  coined  into  standard  gold  coins 
of  the  fineness  and  weight  represented  by  the 
legal  tender  Treasury  Notes  heretofore  pro- 
vided for,  without  canceling  a  corresponding 
amount  of  legal  tender  Treasury  Notes,  with 
authority  to  issue  against  the  same  gold 
certificates  of  a  corresponding  amount  to  be 
held  as  a  gold  reserve  of  not  less  than  30  or  40 
per  centum  of  the  amount  of  legal  tender 
Treasury  Notes  outstanding  ? 

Fourth:  Shall  it  be  treated  as  a  commodity  and 
given  no  coinage  privileges  ? 

Fifth:  Shall  it  be  received  at  the  Governmental 
Treasury  and  held  on  deposit  in  the  form  of 
gold  bars  of  standard  fineness  and  suitable 
weight  against  the  issue  of  redeemable  gold 
certificates  of  suitable  denominations  and 
full  legal  tender  privileges  on  an  equality 
with  the  legal  tender  Treasury  Notes  previ- 
ously placed  in  circulation  ? 

Sixth:  Shall  it  be  received  at  the  Governmental 
Treasury  and  held  on  deposit  in  the  form  of 
gold  bars  of  standard  fineness  and  suitable 
weight,  without  the  issue  against  it  of  re- 
deemable gold  certificates;  but  that  in  lieu 
thereof  there  be  issued  against  such  deposits 
legal  tender  Treasury  notes  of  a  like  amount 
and  of  the  same  design  and  character  as 
those  heretofore  mentioned,  or : 


52    PASSING  OF  THE  GOLD  RESEKVE 

Seventh:  Shall  the  gold  bars  so  deposited  in  the 
Governmental  Treasury  be  subject  to  with- 
drawal only  under  the  supervision  and  sanc- 
tion of  designated  Governmental  authority 
when  actually  intended  and  necessary  for 
export  in  settlement  of  balances  of  Trade 
due  abroad,  or  when  necessary  and  intended 
for  actual  use  in  the  arts  and  manufactures 
at  home,  on  the  payment  of  assay,  smelting 
and  refining  charges  incurred,  and  on  the 
payment  of  such  further  withdrawal  charge 
as  the  then  existing  conditions  of  the  foreign 
exchange  markets  may  make  desirable,  in 
order  that  the  exchanges  may  be  equalized 
and  that  full  protection  against  the  unwar- 
ranted and  unnecessary  withdrawal  of  such 
gold  deposits  may  be  afforded  ? 

Having  heretofore  launched  our  "  modern  com- 
munity "  upon  a  successful  career  as  a  progressive, 
agricultural  and  industrial  country,  without  a  gold 
coinage  in  any  form,  it  becomes  a  matter  of  the 
greatest  importance  to  determine  how  far  this  in- 
flux of  gold  shall  be  allowed  to  affect  the  existing 
legal  tender  Treasury  Note  currency  system  al- 
ready in  successful  operation  for  all  domestic  and 
internal  purposes. 

Before  therefore  passing  upon  the  merits  of  the 
various  foregoing  propositions  it  will  be  of  in- 
terest to  examine  more  closely  into  the  history  and 
development  of  the  gold  standard  as  it  exists 
to-day. 


CHAPTER  VII 
THE  GOLD  STANDARD 

It  has  been  heretofore  stated  that  "  The  early 
exchanges  were  conducted  by  the  direct  barter  of 
one  commodity  for  another  and  that  by  various 
tedious  stages  a  system  of  exchange  was  finally 
developed  whereby  all  commodities  and  labor  were 
measured  in  terms  of  some  fixed  standard  called 
money,"  also  that  "  by  virtue  of  certain  qualities 
of  inherent  beauty,  serviceability,  etc.,  gold  at  an 
early  day  came  to  be  utilized  extensively  as  that 
standard  of  exchange."  In  its  early  uses  gold  was 
treated  as  a  commodity.  Thus  in  former  times 
goldsmiths  were  the  recognized  dealers  in  gold 
until  finally  organized  government  reserved  to 
itself  the  right  to  "  coin  money  and  to  fix  the 
value  thereof."  Exercising  this  reservation  gold 
came  to  be  coined  into  money,  and  the  value,  weight, 
and  fineness  thereof  fixed  by  Legislative  enactment. 
The  gold  coinage  so  provided  for  at  first  circulated 
freely  from  hand  to  hand.  Later  as  paper  issues 
were  resorted  to,  gold  was  set  aside  as  a  reserve 
for  the  ultimate  redemption  of  such  paper  issues 
and  held  on  deposit  at  the  public  Treasury,  or  at  the 
Governmental  Bank  of  Issue,  where  one  existed. 

Acting  on  the  theory  that  all  governmental  is- 
sues of  paper  currency  must  be  convertible  into 
gold  at  all  times  on  demand  in  order  to  have  the 
requisite  requirements  to  constitute  sound  money, 
and  assuming  furthermore  that  the  whole  amount 
of  governmental  paper  issued  would  not  in  all  prob- 
ability be  presented  for  redemption  at  one  and  the 

53 


54    PASSING  OF  THE  GOLD  RESERVE 

same  time,  it  soon  became  the  practice  to  set  aside 
certain  proportions  of  gold  as  a  reserve  to  provide 
for  the  immediate  redemption  of  such  governmen- 
tal paper  issues  as  might  be  presented. 

Frequent  reference  is  made  to  the  gold  reserves 
of  the  Bank  of  England,  the  Bank  of  France,  the 
Bank  of  Germany,  and  other  institutions  of  that 
kind.  From  the  brief  reference  to  the  operations  of 
such  institutions  in  the  foregoing  pages,  particu- 
larly with  reference  to  the  issue  of  emergency  cur- 
rency (Chapter  IV)  we  have  incidentally  observed 
that  the  rise  and  fall  of  the  gold  reserve  held  by  such 
institutions  constitutes  a  factor  of  no  small  im- 
portance in  that  it  may  affect  the  welfare  and  im- 
mediate solvency  of  the  business  community. 

There  is  not  necessarily  anything  economically 
wrong  in  the  establishment  of  the  gold  standard 
for  the  measure  of  values  existing  to-day.  In  fact 
it  is  a  commercial  and  economic  necessity  of  modern 
times.  Without  it  domestic  and  foreign  commerce 
could  not  be  maintained,  and  present  civilization 
would  be  impossible.  The  gold  standard  as  a  meas- 
ure of  values  should  not  therefore  be  held  respon- 
sible for  any  of  the  commercial  or  financial  ills  of 
the  present  day ;  but  rather  the  extreme  lengths  to 
which  its  uses  have  been  extended  in  forming  the 
basis  for  modern  currency  and  that  leads  us  to  the 
consideration  of  the  "  Tyranny  of  the  Gold  Re- 


serve.' 


CHAPTER  VIII 

THE  TYRANNY  OF  THE  GOLD  RESERVE 

We  have  in  the  preceding  chapters  successfully 
demonstrated  that  it  is  neither  essential  nor  neces- 
sary that  a  "  gold  reserve  "  be  maintained  to  insure 
the  redemption  and  cancellation  of  "  Emergency 
Currency  "  where  such  currency  is  issued  solely 
on  the  deposit,  or  rediscount  of  "  commercial  bills 
of  exchange  "  of  the  highest  quality,  covering  goods 
actually  sold  and  moving  in  commerce,  whether 
such  currency  is  issued  direct  through  the  National 
Treasury,  or  through  a  semi-governmental  bank- 
ing institution,  created  for  that  purpose,  with  paid 
in  capital  and  with  or  without  accumulated  surplus 
from  earnings. 

We  have  also  demonstrated  that  the  prime  and 
foremost  objective  of  an  " Emergency  Currency  " 
is  that  of  affording  immediate  relief  to  the  banking 
and  commercial  community  interested  in  the  suc- 
cessful financing  of  legitimate  commerce.  In  fact 
we  have  demonstrated  that  by  making  provision  for 
the  issue  of  "  Emergency  Currency  "  as  stated, 
legitimate  commerce  is  at  all  times  able  to  "finance 
itself/'  That  is  to  say : — that  by  the  deposit,  or  re- 
discount of  commercial  bills  of  exchange  of  the 
highest  quality,  it  can  at  all  times  secure  ready 
money  of  full  legal  tender  quality  to  move  merchan- 
dise while  traveling  in  the  ordinary  course  of  trade 
between  the  original  producer  or  manufacturer,  and 
the  final  and  ultimate  consumer,  who  must  after  all 
eventually  pay  for  the  goods  through  a  return  of 

55 


56    PASSING  OF  THE  GOLD  RESERVE 

the  "  Emergency  Currency  "  issued  thereon  after 
it  shall  have  accomplished  its  purpose. 

In  order  therefore  that  we  may  the  more  fully 
appreciate  and  understand  the  great  importance 
of  these  fundamental  principles  let  us  for  the  mo- 
ment examine  somewhat  more  closely  into  the  op- 
erations of  the  "  Gold  Reserve  "  as  maintained 
under  the  leading  banking  systems  of  this  day. 

We  find  accordingly  that  under  the  English  sys- 
tem it  is  not  only  one  of  the  functions  of  the  Bank  of 
England  to  act  as  the : 

4.  "  Provider  of  emergency,"  but  to  act  in  addition  thereto 
as  the: 

5.  "  Keeper  of  the  gold  reserve  for  British  banking,"  and 
as  the: 

6.  "  Keeper  of  the  gold  reserve  which  is  most  readily  available 
for  the  purposes  of  international  banking." 

Another  function  of  the  Bank  of  England,  and 
that  a  very  important  one,  is  that  of  earning  divi- 
dends for  its  shareholders  on  the  capital  stock  in- 
vested. To  this  end  its  capital  stock,  and  deposits 
(which  include  the  bank  reserve  of  British  bank- 
ing) are  constituted  a  bank  reserve  of  that  insti- 
tution against  the  issue  of  Bank  of  England  Notes 
of  two,  three  or  more  times  its  volume,  secured  by 
discounted,  or  rediscounted  bills  of  exchange,  by 
loans  at  call,  bonds,  stock  exchange  securities,  etc., 
subject  to  the  requirement  that  for  all  issues  of 
bank  notes  beyond  the  sum  of  £18,450,000  a  gold 
reserve  of  100  per  cent  must  be  maintained. 

If  a  bank  reserve  of  ten  per  centum  of  the  amount 
originally  deposited  at  the  local  bank  is  considered 
an  average  and  reasonable  bank  reserve,  it  follows 
that  for  every  pound  sterling  originally  deposited 
there  are  outstanding  total  credits  issued  to  others 
of  ten  times  that  amount.  Should  the  original  de- 
positor now  conclude  to  withdraw  his  deposit  from 


TYRANNY  OF  THE  GOLD  EESERVE    57 

his  local  bank  for  the  purpose  of  meeting  payments 
abroad  in  gold  it  follows  that  the  local  bank  will  be 
compelled  to  withdraw  its  deposit  from  the  Bank 
of  England,  where  it  was  redeposited  as  its  bank 
reserve  against  the  loans  made  thereon.  By  the 
withdrawal  of  such  deposit  the  support  is  thereby 
withdrawn  from  loans  of  two  or  more  times  its 
volume  made  thereon  by  the  Bank  of  England  and 
necessitates  the  calling  in  of  outstanding  loans  by 
that  institution  in  order  that  the  established  pro- 
portion of  its  gold  reserve  against  deposits  and 
against  bank  notes  issued  may  be  maintained,  not- 
withstanding that  the  loans  may  have  been  made  on 
the  highest  class  of  commercial  bills  of  exchange 
and  will  be  fully  paid  for  and  satisfied  on  maturity, 
by  the  return  to  the  Bank  of  England,  of  the  Bank 
of  England  notes  issued  thereon. 

Where  such  withdrawals  are  made  on  a  large 
scale  it  may  happen  that  the  Bank  of  England  is 
unable  to  maintain  its  gold  reserve  at  the  prescribed 
figure  although  strenuous  efforts  may  have  been 
resorted  to  for  that  purpose  by  the  calling  in  of 
outstanding  loans  and  by  raising  the  rate  of  dis- 
count to  discourage  further  loans.  In  fact  under 
such  circumstances  the  gold  reserve  system  of  the 
Bank  of  England  has  in  the  past  completely  broken 
down  as  is  evidenced  by  the  fact  that  at  various 
times  in  the  past  during  periods  of  financial  strin- 
gency and  panic — in  1847,  1857,  1866  and  again 
during  the  late  World  War  it  became  necessary  by 
Act  of  Parliament  to  suspend  the  provisions  of  the 
Bank  Act  restricting  the  issue  of  uncovered  Bank 
of  England  Notes,  and  to  permit  unlimited  issues 
in  excess  of  £18,450,000  without  requiring  the  main- 
tenance of  a  gold  reserve  thereon. 


58    PASSING  OF  THE  GOLD  RESERVE 

It  may  be  suggested,  and  undoubtedly  with  con- 
siderable force,  that  the  conditions  bringing  about 
this  breakdown  may  have  beeen  aggravated  by  the 
fact  that  loans  in  large  volume  were  made  on  specu- 
lative stock  securities,  the  value  of  which  was 
rapidly  fluctuating;  but  it  unquestionably  proves 
that  the  function  of  the  Bank  of  England  to  act  as 
the  "  Provider  of  Emergency  Currency  "  ceased  to 
operate  until  the  restrictions  as  to  maintaining  a 
gold  reserve  had  been  suspended  during  the  emer- 
gency. 

If  we  bear  in  mind  that  the  true  function  of  an 
Emergency  Currency  is  that  of  providing  new  or 
additional  currency,  to  aid  and  support  legitimate 
commerce,  especially  so  during  times  of  great  finan- 
cial stress,  we  can  realize  fully  how  the  maintenance 
of  a  gold  reserve  may  seriously  impair  or  totally 
neutralize  that  function  to  the  great  injury  of  legiti- 
mate commerce  and  the  activities  dependent 
thereon. 

As  the  maintenance  of  a  gold  reserve  against  the 
issue  of  Emergency  Currency  in  fact  acts  as  a  bar 
and  deterrent  against  the  free  and  untrammelled 
operation  of  the  function  of  "  Providing  Emer- 
gency Currency  "  on  the  deposit  or  rediscount  of 
bills  of  exchange  growing  out  of  bona  fide  commer- 
cial transactions  maturing  within  90  days  or  less 
and  having  two  or  three  responsible  endorsers 
thereto,  it  is  but  natural  that  we  should  conclude 
not  to  incorporate  that  provision  in  the  "  Emer- 
gency Currency  System  "  as  heretofore  provided 
for  our  modern  country  herein  under  consideration. 

The  same  resolve  applies  with  equal  force  to  the 
"  Legal  tender  Treasury  Notes  "  issued  by  the 
National  Treasury,  certain  redemption  and  cancel- 


TYRANNY  OF  THE  GOLD  RESERVE    59 

lation  of  which  has  been  otherwise  fully  estab- 
lished and  provided  for. 

This  resolve  to  refuse  to  change  to  a  "  gold  re- 
serve system  "  will  be  strengthened  the  more  if  the 
reader  will  pause  for  a  moment  to  look  about,  and 
come  to  realize,  that  the  great  majority  of  the  na- 
tions on  the  face  of  the  globe  to-day,  do  not  produce 
gold  from  mines  or  other  natural  deposits  within 
their  own  territory. 

It  has  been  the  boast  of  financial  and  economic 
writers  for  many  years,  that  owing  to  the  large 
production,  or  holdings,  of  gold,  by  this  or  that 
country,  other  countries  not  so  favorably  situated, 
can  be  held  in  financial  and  economic  bondage ;  and 
indeed  that  is  true,  if  we  stop  for  a  moment  to  con- 
sider, that  it  requires  a  problem  of  but  the  simplest 
nature  to  demonstrate,  that  all  countries  cannot 
have  the  benefit  of  a  favorable  balance  of  trade  at 
one  and  the  same  time.  In  fact  it  is  self-evident 
that  a  balance  of  trade  in  favor  of  one  nation  must 
necessarily  be  offset  by  an  unfavorable  balance  of 
some  other  nation,  or  nations. 

Unfavorable  balances  of  trade  must  be  paid  for. 
Where  the  country  affected  has  no  gold  it  is  the 
usual  policy  to  place  a  loan  abroad  with  some  coun- 
try being  more  favorably  situated  with  respect  to 
the  holding  of  gold,  with  the  hope  that  at  some 
future  time  the  balance  of  trade  may  shift  in  favor 
of  the  borrowing  country  and  thus  afford  means 
for  cancelling  the  debt.  If,  on  the  other  hand,  in 
addition  to  providing  for  the  payment  of  the  debt 
abroad  gold  is  brought  into  the  country  to  build  up 
the  gold  reserve  supporting  the  currency  and  the 
adverse  balance  continues,  such  gold  will  again  in- 
evitably flow  out  of  the  country  thereby  throwing 


60    PASSING  OP  THE  GOLD  EESERVE 

the  country  upon  a  "  depreciated  paper  currency  " 
basis. 

As  this  depreciation  continues  the  prices  paid 
for  articles  imported  from  abroad  will  constantly 
go  higher  and  higher,  while  those  obtained  abroad 
for  the  products  of  home  industry  will  go  lower  and 
lower,  leading  to  inevitable  commercial  and  indus- 
trial depression  thereby  retarding  and  making 
impossible  the  natural  growth  and  internal 
development,  that  the  fertility  of  the  soil,  and  the 
intelligence  and  industry  of  the  peoples  of  such 
countries  entitles  them  to.  That  this  state  of  affairs 
exists  in  many  of  the  non-gold  producing  countries, 
especially  those  of  Central  and  South  America  as 
well  as  those  of  Europe  to-day,  cannot  be  doubted, 
as  will  be  seen  from  an  examination  of  the  following 
table  of  estimates  of  the  "  values  of  foreign  coins  ' 
as  made  by  the  Director  of  the  United  States  Mint. 
(January  1, 1920.  Treasury  Decision  38231.) 

(T.  D.  38231) 

Values  of  Foreign  Coins 
[Circular  No.  1] 

"  TREASURY  DEPARTMENT,  January  1,  1920. 

"  In  pursuance  of  the  provisions  of  Section  25  of  the  Act  of 
August  27,  1894,  I  hereby  proclaim  the  following  estimate  by 
the  Director  of  the  Mint  of  the  values  of  pure  metal  contents  of 
foreign  coins  to  be  the  values  of  such  coins  in  terms  of  the 
money  of  account  of  the  United  States,  to  be  followed  in  esti- 
mating the  value  of  all  foreign  merchandise  exported  to  the 
United  States  during  the  quarter  beginning  January  1,  1920, 
expressed  in  any  such  metallic  currencies. 

"  Entries  of  merchandise  liquidated  upon  the  values  pro- 
claimed herein  will  be  subject  to  reliquidation  upon  the  order  of 
the  Secretary  of  the  Treasury  whenever  satisfactory  evidence 
shall  be  produced  to  him  showing  that  the  values  in  United 
States  currency  of  the  foreign  money  specified  in  the  invoices 
were  at  the  date  of  certification  at  least  10  per  cent  more  or  less 
than  the  values  herein  proclaimed. 

"  CARTER  GLASS,  Secretary/' 


TYRANNY  OP  THE  GOLD  RESERVE    61 


ESTIMATE  BY  THE  DIRECTOR  OF  THE  MINT  OF  THE  VALUES 
OF  FOREIGN  COINS 


Country. 

Legal 
standard. 

Monetary  unit. 

Value 
in 
terms 
of 
U.S. 
money. 

Remarks.1 

Argentine  Re- 
pnblic. 

Gold     

Peso  .  .  . 

MM 

Currency  :  Depreciated  paper, 
convertible  at  44  per  cent  of 
face  value  ;    exchange  rate 

about  10.4325. 

Austria-Hungary 

.do  

Krone  . 



.2026 

Exchange  rate  about  $0.0061  =  1 
krone. 

•p     1      • 

ft   lfi   &nd 

.1930 

Member  Latin  Union  ;  gold  is 

neigiuiii  ••••••••• 

silver. 

actual  standard.    Exchange 

value  $0.098. 

Bolivia  

Gold  

Bolivia) 

10         •  •  •  •  • 

.3893 

12}  bolivianos  equal  1  pound 
sterling  ;      exchange     rate 

about  $0.3257. 

Brazil 

do  .  . 

Milreis 

.5462 

Currency  i  Government  paper  ; 

exchange  rate  about  $0.28  to 

the  milreis. 

British    Colonies 

do 

'ound  s 

terlinr  ... 

4.8666 

in    Australasia 

and  Africa. 

0&nftd& 

.do  

Dollar 

1.0000 

Central  American 

States  : 

Costa  Rica... 

.do  

Colon.. 



.4668 

Exchff.  rate  $0.3448=1  colon. 

British    lion* 

.do  

Dollar 

1.0000 

duras. 

Nicaragua  .  .  . 

.do  

Cordobi 

1.0000 

Exchange  rate  $0.995. 
rQuatemala  :  Currency  incon- 

.            ••••*. 

Guatemala  .  . 
Honduras.... 

•  Silver 

Peso  .  .  . 

.9171 

1     vertible  payer. 
|  Honduras  :    Currency,   bank 

I     notes. 

Salvador  — 

Gold  

Colon.. 



.6000 

Exchange  rate  about  $0.6128. 

.do  

Peso  .  .  . 

.3650 

Currency:    Inconvertible  pa- 

per ;    exchange  rate  about 

$0.1826. 

Amoy  

.6191 

Canton  

.6146 

Cheefoo... 

.4529 

ChinKiang 

.4840 

China 

Silver  ...- 

Tael..- 

Fuchau  .  .  . 
Haikwan 
(customs] 
Hankow  . 
Kiaochow 
Nankin  .. 
Niuchwang 

.4052 
.5457 

.4213 
.4721 
.5033 
.4246 

Thetael  is  a  unit  of  weight, 
not  a  coin.    The  customs 
unit  is  the  Haikwan  tael. 
The  values  of  other  taels 
are  based  on  their  relation 
to  the  value  of  the  Haikwan 

Ningpo... 
Peking... 
Shanghai. 
Swatow  .  . 
Takau.... 
Tientsin.. 

.4606 
.4810 
.3876 
.4033 
.5287 
.4721 

tael. 
The  Yuan  silver  dollar  of  100 
cents  is  the  monetary  unit 
of  the  Chinese  Republic  ; 
it  is  equivalent  to  0.644  + 
of  the  Haikwan  tael. 

[Yuan  .... 

.9955 

Dollar-* 

Hongkong 
British... 

.9991 
.9991 

Mexican  . 

1.0065 

Colombia  

Gold  

Dollar 

.9733 

Currency  :  Government  paper 

and    gold  ;     exchange    rate 

about  $1.0152  to  1  gold  peso. 

Cuba  

..do  

Peso.  . 



1.0000 

Denmark  

..do  

Krone 

.2680 

Exchg.  rate  $0.1925=1  krone. 

Ecuador  ........ 

..do    .     .. 

.4867 

Exchange  rate  $0.4695. 

Egypt  

..do  

Pound  (100  piasters 

4.9431 

The    actual    standard    is   the 
British    pound    sterling, 

which  is  legal  tender  for  97* 

piasters. 

1  The  exchange  rates  shown  under  this  heading  are  recent  New  York  quotations  and 
are  given  merely  as  an  indication  of  the  values  of  currencies  which  are  fluctuating  in 
their  relation  to  legal  standards. 


62    PASSING  OF  THE  GOLD  RESERVE 


ESTIMATE  BY  THE  DIRECTOR  OF  THE  MINT  OF  THE  VALUES 
OF  FOREIGN  COINS.— CONTINUED 


Country. 

Legal 

standard. 

Monetary  unit. 

Value 
in 
terms 
of 
U.S. 
money. 

Remarks. 

Finland  

..do  

Markka  

.1930 
.1930 

.2382 

4.8665 
.1930 

.'2500 

.3244 

1  0008 
.1930 

.4985 
1.0000 

.4985 

.4020 
1.0000 
.2680 
1.0000 
.9648 

.0959 
.1706 

4.8665 
.5000 
1.0805 

.1930 

.5146 
1.0000 
.1930 

.8709 
.1930 

.5678 

.2680 
.1930 

.0440 

1.0332 
.1930 

Exchg.  rate  $0.03=1  markka. 
Member  Latin  Union  ;  gold  is 
actual  standard  ;  exchange 
value  $0.0952. 
Exchange  rate  about  $0.0215=1 
mark. 
Exchange  value  $3.83. 
Member  Latin  Union  ;  gold  is 
actual  standard.    Exchange 
value  $0.155. 
Currency:    Inconvertible   pa- 
per, exchange  rate  approx- 
imately $0.20. 
15  rupees  equal  1  pound  ster- 
ling. Exchange  rate  $0.4525. 

Member  Latin  Union  ;  gold  is 
actual  standard.     Exchange 
value  $0.0769. 
Exchange  value  $0.5025. 
Currency  :  Depreciated  silver 
token  coins.  Customs  duties 
are  collected  in  gold. 
Exchange    value   silver   peso 
$1.015;  gold  peso  $0.50. 
Exchange  value  $0.3775. 

Exchg.  rate  $0.2075=1  krone. 

Currency:  Depreciated  Para- 
guayan paper  currency. 
["Currency  :  Silver  circulating 
above   its   metalic   value: 
j     exchange   value   of   silver 
L    kran  approximately  $0.179. 
Exchange  rate  about  $4.30. 
Exchange  rate  about  $0.4925. 
Currency  :   Inconvertible  pa- 
per ;    exchange   rate   about 
$0.364. 
Exchange  rate  about  $0.031=1 
leu. 

Exchange  rate  about  $0.046=1 
dinar. 
Exchange  rate  $0.395  =  1  tical. 
Valuation  is  for  gold  peseta  ; 
currency  is  notes  of  the  bank 
of    Spain,   exchange    value 
approximately  $0.195. 
Exchange  rate  $0.5025. 

Exchg.  rate  $0.2175=1  krona. 
Member  Latin  Union  ;  gold  is 
actual  standard.     Exchange 
value  $0.1812. 
100  piasters  equal  to  the  Turk- 
ish £.    Exchange  rate  about 
$1.50=1  Turkish  £. 
Exchange  rate  $1.0504. 
Exchange  rate  about  $0.1932. 

Gold  and 
silver. 

Gold  

..do  

Gold  and 
silver. 

Gold  

..do  

Silver  .... 
Gold  and 
silver. 

Gold  
..do  

Germany  

Great  Britain  .  .  . 
Greece  

Mark  

Pound  sterling  

Haiti  

India  [British].. 

Italy 

Lira  

Japan  

Yen  
Dollar  

Mexico  

..do  

Netherlands  
Newfoundland.  .  . 
Norway  

..do  
..do  
..do  
do 

Guilder  (florin)  ... 
Dollar 

Balboa  

Paraguay  

..do  

(Gold  
1  Silver  ... 

Gold... 
..do  
..do  

..do  
..do  ... 

Peso  (Argentine).. 
Achrefi  

Peru  
Philippine  Islds. 
Portugal  

Roumania  
Russia  

Kran  

Libra  
Peso  

Escudo  . 

Leu  
Ruble  

Santo  Domingo.  . 
Servia  

Siam  

Spain 

..do  
..do  

..do  
Gold  and 
silver. 

Gold  

..do  
..do  

..do  

..do  
..do  

Dollar  

Dinar  

Tical  
Peseta     

Straits  Settle- 
ments. 
Sweden  
Switzerland  .   .  .  . 

Turkey  

Uruguay  
Venezuela  

Dollar   

Piaster  

Peso  
Bolivar        

TYRANNY  OF  THE  GOLD  RESERVE    63 

It  will  thus  be  observed  that  where  countries 
have  no  appreciable  gold  and  nevertheless  insist 
upon  keeping  up  the  attempt  to  maintain  a  paper 
currency  at  par  on  a  gold  reserve  basis  the  inevi- 
table result  is  a  depreciation  of  that  currency  and 
the  establishment  of  a  premium  on  gold,  as  the 
gold  leaves  the  country.  On  the  other  hand  we 
have  also  observed  that  where  countries  are  large 
holders  of  gold,  but  maintain  a  convertible  paper 
currency  on  a  gold  reserve  basis,  the  commerce  and 
industry  of  such  countries  is  likewise  subjected  to 
violent  strains,  as  outstanding  loans  are  called  in 
and  new  loans  are  withheld,  in  order  that  the  gold 
reserve  may  be  maintained  at  the  desired  volume. 

This  very  naturally  brings  us  to  the  conclusion 
that  the  burden  of  financing  the  whole  world  is  too 
great  for  gold  alone  to  bear,  and  that  it  is  no  longer 
wise  to  rely  on  a  gold  reserve  of  one  part  to  liquidate 
an  indebtedness  of  two,  three,  ten  or  more  times  its 
volume.  When  these  facts  shall  have  been  fully 
appreciated  by  the  nations  interested,  a  long  step 
forward  will  have  been  taken,  and  the  "  Tyranny 
of  the  Gold  Reserve  "  will  have  become  a  thing  of 
the  past. 


CHAPTER  IX 

EQUALIZING  FOREIGN  EXCHANGE 

Having  thus  concluded  not  to  transform  the  es- 
tablished "  Legal  tender  Treasury  Note  "  and  the 
"  Emergency  Currency  "  systems  of  our  "  Modern 
Country  "  into  a  "  Gold  Reserve  System"  it  be- 
comes necessary  to  consider  only  the  sixth  and 
seventh  propositions  regarding  the  disposition  of 
gold  imports  outlined  in  Chapter  V  dealing  with 
the  "  Balance  of  Trade,"  viz. : 

Sixth:  Shall  it  be  received  at  the  Governmental 
Treasury  and  held  on  deposit  in  the  form  of 
gold  bars  of  standard  fineness  and  suitable 
weight,  without  the  issue  against  it  of  re- 
deemable gold  certificates;  but  that  in  lieu 
thereof  there  be  issued  against  such  deposits 
legal  tender  Treasury  Notes  of  a  like  amount 
and  of  the  same  design  and  character  as  those 
heretofore  mentioned ;  or — 

Seventh:  Shall  the  gold  bars  so  deposited  in  the 
Govermental  Treasury  be  subject  to  with- 
drawal only  under  the  supervision  and  sanc- 
tion of  designated  Governmental  authority 
when  actually  intended  and  necessary  for 
export  in  settlement  of  balances  of  trade  due 
abroad,  or  when  necessary  and  intended  for 
actual  use  in  the  arts  and  manufactures  at 
home,  on  the  payment  of  assay,  smelting  and 
refining  charges  incurred,  and  on  the  pay- 
ment of  such  further  withdrawal  charge  as 
the  then  existing  conditions  of  the  foreign 

64 


EQUALIZING  FOREIGN  EXCHANGE    65 

exchange  markets  may  make  advisable,  in 
order  that  the  exchanges  may  be  equalized 
and  that  full  protection  against  the  unwar- 
ranted and  unnecessary  withdrawal  of  such 
gold  deposits  may  be  afforded  ? 

In  the  foregoing  chapters  it  has  been  fully  demon- 
strated that  it  is  a  matter  of  imperative  necessity 
that  adverse  balances  of  trade  due  abroad  be  paid 
for  in  gold.  In  order  that  this  may  be  done 
promptly  and  effectively  in  the  absence  of  the  free 
and  open  coinage  of  gold,  it  becomes  a  matter  of  the 
utmost  importance  that  the  established  Government 
assume  and  exercise  control  and  supervision  over 
the  import  and  export  of  gold  in  order  that  com- 
merce and  trade  with  foreign  nations  may  be 
facilitated.  The  sixth  and  seventh  propositions 
submitted  are  therefore  designed  to  meet  that 
requirement. 

Gold  bars  of  recognized  fineness  with  the  govern- 
mental assay  stamp  affixed  thereto,  have  for  many 
years,  and  are  to-day,  considered  in  international 
banking  and  trade,  the  prime  medium  of  exchange 
for  the  settlement  of  international  balances.  Pre- 
vious to  the  recent  war  such  gold  bars  could  be  with- 
drawn from  the  Bank  of  England  for  export  upon 
the  deposit  of  Bank  of  England  notes  of  like  value. 
They  could  also  be  withdrawn  from  the  United 
States  Treasury  upon  deposit  of  a  like  amount  of 
Gold  certificates  or  of  United  States  Treasury 
Legal  Tender  Notes.  The  same  was  true  under  the 
French  system  with  the  exception  that  certain  with- 
drawal charges  to  cover  costs  of  assay  and  the  like 
were  added. 

The  term  "Balance  of  Trade  "  as  used  in  inter- 
national commerce  has  reference  solely  to  the  differ- 


66    PASSING  OF  THE  GOLD  RESERVE 

ence  existing  between  the  total  amount  of  exports 
and  imports  of  any  particular  country  for  a  par- 
ticular period  as  evidenced  by  official  governmen- 
tal records  and  statistics,  of  merchandise  imported 
and  exported,  under  Customs  supervision.  The 
gold  supply  of  every  country  is,  however,  subject 
to  a  further  drain  through  what  may  be  called  the 
"  Invisible  Balance  of  Trade  "  growing  out  of  the 
bringing  in,  and  the  taking  out,  of  gold  for  which 
no  official  record  or  supervision  has  heretofore  been 
provided,  such  as  the  taking  abroad  of  gold  by  trav- 
elers, or  the  investment  in  foreign  securities  or 
enterprises ;  or  in  the  sale  of  domestic  securities  for 
shipment  abroad  and  the  subsequent  return  of  such 
securities  from  foreign  countries. 

If  we  stop  to  consider  that  the  drains  upon  the 
gold  supplies  of  a  country  are  equally  effective 
whether  the  withdrawals  are  made  visibly,  or  invis- 
ibly, in  that  by  either  method  the  reserve  or  foun- 
dation, upon  which  credits  equal  to  twelve  or  more 
times  its  volume  may  have  been  issued,  is  taken 
away,  the  advisability  and  necessity  of  exercising 
governmental  supervision  and  control  over  with- 
drawals will  become  fully  apparent.  Thus  in  con- 
sequence of  conditions  growing  out  of  the  recent 
World  War  various  government  found  it  expedient 
to  either  absolutely  prohibit,  or  to  regulate,  the 
exportation  of  gold.  Accordingly,  under  various 
war  measures  adopted  by  the  United  States  pro- 
vision was  made  for : 

"  1.  The  registration  of  dealers  in  foreign  exchange  or  in 
securities  for,  or  through  foreign  correspondents. 

"  2.  The  prohibition  of  the  exportation  of  gold  in  settlement 
of  international  trade  except  in  pursuance  of  a  license  to  export 
first  duly  obtained. 

"  3.  Limiting  the  amount  of  gold  and  paper  currency  (re- 
deemable in  gold)  that  a  traveler  leaving  the  United  States  for 
foreign  territory  might  carry  with  him  as  a  part  of  his  baggage. 


EQUALIZING  FOKEIGN  EXCHANGE    67 

"  4.  Regulating  the  withdrawal  of  gold  from  the  public 
Treasury  and  limiting  the  uses  to  which  it  might  be  applied  in 
the  arts  and  manufactures  at  home." 

This  then  brings  us  to  the  consideration  of  the 
next  problem,  namely,  that  of  "  regulating  or  equal- 
izing foreign  exchanges."  While  we  have  not  thus 
far  had  occasion  to  discuss  foreign  exchanges  in  so 
far  as  they  might  be  affected  favorably,  or  unfavor- 
ably, in  consequence  of  the  inflow  or  outflow  of  gold, 
growing  out  of  the  rise  and  fall  in  the  rate  of  dis- 
count for  commercial  paper,  the  reader  will  ob- 
serve, by  turning  to  Chapter  IV  under  the  descrip- 
tion of  the  operations  of  the  Bank  of  England  that 
great  stress  is  there  laid  upon  regulating  the  gold 
reserve  by  either  raising  or  lowering  the  rate  of 
discount;  namely,  that  a  raising  of  the  rate  of 
discount  discourages  loans  and  causes  gold  to  flow 
into  the  Bank  of  England,  and  that  lowering  the 
rate  of  discount  encourages  loans  and  causes  gold 
to  flow  out  of  the  Bank's  custody. 

If  raising,  or  lowering,  the  rate  of  discount,  that 
is  to  say,  if  raising,  or  lowering,  the  price  at  which 
the  use  of  gold  may  be  obtained  at  the  Bank  of 
England  will  cause  gold  to  flow  in  or  out  of  that 
Bank,  as  the  case  may  be,  it  is  equally  true  that  by 
raising  or  lowering  the  price  at  which  gold  bars 
may  be  secured  at  the  public  Treasury  for  export 
in  settlement  of  Balances  of  Trade  of  our  Modern 
Country  herein  under  consideration,  gold  will  like- 
wise flow  in  or  out,  thus  increasing  or  diminishing 
the  available  gold  supply  of  the  country  and  regu- 
lating the  exchanges  as  fully  and  as  effectively  as  is 
now  done  under  the  Bank  of  England  System. 

The  advantages  of  this  solution  of  the  problem 
are  many : 

First:  It  conserves  the  gold  supply  of  the  country 
for  effective  work  where  most  needed. 


68    PASSING  OF  THE  GOLD  RESERVE 

Second:  It  entirely  removes  the  necessity  for  a 
gold  reserve  against  "  Legal  Tender  Treas- 
ury Notes  "  or  "  Emergency  Bank  Notes  " 
outstanding. 

Third:  It  facilitates  commercial  and  international 
banking. 

Fourth:  It  stabilises  commerce  and  trade  in  that  it 
removes  the  danger  of  the  unexpected  calling 
in  of  loans  in  consequence  of  a  lowering  of 
the  volume  of  the  gold  reserve  and  all  the 
disastrous  consequences  resulting  therefrom. 

We  have  thus  followed  the  development  of  our 
Modern  Country  from  very  small  beginnings  with 
no  gold  and  without  a  gold  reserve  currency,  to  a 
fully  developed  commercial  country  engaged  in 
prosperous  foreign  trade,  capable  of  maintaining 
its  position  among  other  nations  of  the  world  in 
times  of  peace.  In  view  of  the  extraordinary  strain 
that  has  been,  in  the  past,  thrown  upon  all  known 
currency  systems  in  case  of  war,  it  becomes  there- 
fore a  matter  of  considerable  interest  to  ascertain 
whether  the  currency  system  herein  devised  can 
successfully  withstand  that  strain,  which  leads  us 
then  to  the  consideration  of  the  next  problem: 
"  Financing  the  War." 


CHAPTER  X 
FINANCING  THE  WAR 

In  Chapter  I  on  "  Financing  the  Government '; 
the  Secretary  of  the  Treasury  was  authorized  to 
issue,  day  by  day,  full  legal  tender  Treasury  Notes 
in  sufficient  amounts  to  defray  the  actual  running 
expenses  of  the  Government,  and  in  that  connection 
it  was  pointed  out  that  it  might  so  happen  that  the 
legal  tender  Treasury  Notes  issued  one  day  might 
flow  back  into  the  Governmental  Treasury  the  next 
day,  in  payment  of  taxes,  and  that  under  such  cir- 
cumstances very  few  legal  tender  Treasury  notes 
would  remain  outstanding  and  would  therefore  be 
of  but  limited  service  as  a  circulating  medium  of 
exchange  to  the  public  generally,  and  it  was  there- 
fore suggested  that  the  Secretary  of  the  Treasury 
might  avail  himself  of  the  privilege  of  issuing  such 
notes  in  larger  quantities  in  anticipation  of  the  col- 
lection of  governmental  revenues  for  a  period  of 
90  days  next  ensuing  in  analogy  to  the  present  prac- 
tice of  selling  short-term  notes  or  Treasury  Certifi- 
cates of  indebtedness  to  the  banks,  and  to  keep  the 
notes  so  issued  on  deposit  with  governmental  de- 
positary banking  institutions  where  they  might 
draw  a  small  interest  in  accord  with  the  prevailing 
practice  in  the  United  States. 

If  at  the  outbreak  of  the  war  the  Secretary  of  the 
Treasury  has  availed  himself  of  this  privilege  he 
may  at  once  utilize  these  funds  to  help  defray  the 
initial  costs  of  purchasing  equipment  and  supplies 
for  the  army  and  navy.  When  these  funds  are  ex- 

69 


70    PASSING  OF  THE  GOLD  KESEKVE 

hausted  he  may  issue  further  sums  of  legal  tender 
Treasury  Notes  as  found  necessary ;  provided,  how- 
ever, that  there  shall  not  be  outstanding  at  any  one 
time,  legal  tender  Treasury  notes  in  an  amount 
greater  than  the  total  estimated  revenue  for  the 
fiscal  year,  or  say  rather  for  the  next  ensuing  365 
days.  Having  planned  for  an  estimated  revenue  of 
$10,000,000  per  day,  or  $3,650,000,000  for  the  year, 
legal  tender  Treasury  notes  to  that  amount  may 
therefore  continually  remain  in  circulation  and 
form  the  basic  medium  of  exchange  of  the  country. 

Money,  in  whatever  form,  in  all  countries,  is  the 
prime  medium  of  exchange,  whether  it  be  used  to 
compensate  for  labor,  materials,  or  otherwise.  The 
greater  the  quantity  of  labor  and  materials  to  be 
compensated,  the  greater  must  necessarily  be  the 
supply  of  ready  money  to  accomplish  that  object 
expeditiously  and  successfully.  Nor  must  sight  be 
lost  of  the  fact  that  the  money  so  issued  should  be 
of  value  in  the  community  and  pass  freely  from 
hand  to  hand  at  its  full  face  value.  This  latter 
object  has  been  accomplished  in  the  foregoing  chap- 
ters by  limiting  the  amount  of  the  legal  tender 
Treasury  notes  that  might  be  issued  and  outstand- 
ing at  any  one  time  to  a  sum  not  to  exceed  the  esti- 
mated revenues  for  the  fiscal  year,  or  say  rather 
for  the  next  ensuing  365  days.  By  limiting  the 
total  issue  to  that  sum,  certainty  of  redemption  is 
always  in  open  view. 

Should  the  volume  of  the  legal  tender  Treasury 
note  currency  in  circulation  at  this  stage  still  prove 
insufficient  to  meet  the  increased  daily  running  ex- 
penses incurred  by  the  prosecution  of  the  war,  the 
Government  may  increase  its  yearly  income  by 
raising  its  tax  budget,  whereupon  additional  legal 


FINANCING  THE  WAR  71 

tender  notes  to  a  like  amount  may  be  issued  in  an- 
ticipation of  these  increased  collections  as  hereto- 
fore. 

It  is  of  course  self-evident  that  there  is  a  limit  to 
the  amount  of  immediate  taxation  that  the  re- 
sources and  industry  of  any  country  in  time  of  war 
can  bear.  When  this  limit  has  been  reached  it  will 
no  longer  be  practicable  to  defray  the  increasing 
expenditures  of  the  Government,  in  financing  the 
war,  by  the  issue  of  legal  tender  Treasury  note  cur- 
rency. If  the  Government  therefore  is  still  in  need 
of  ready  funds  to  finance  the  war,  after  having  an- 
ticipated the  current  receipts  from  the  revenue  for 
the  next  ensuing  year,  the  future  must  be  drawn 
upon  by  the  sale  of  Government  bonds  to  the  public, 
to  be  redeemed  and  paid  for  from  the  prospective 
revenues  of  future  years,  after  the  termination  of 
the  war,  when  the  heavy  expenditures  necessary 
to  the  prosecution  of  the  war  shall  have  ceased. 

These  bonds  may  run  for  more  or  less  definite 
periods,  and  may  draw  interest  at  varying  rates  as 
the  credit  of  the  country  at  the  time  of  issue  may 
warrant  and  should  be  made  payable  in  the  legal 
tender  Treasury  notes  of  the  country.  It  is  through 
the  sale  of  such  bonds  that  the  National  Treasury 
is  again  replenished  with  funds  for  the  conduct  of 
the  war.  Bonds  should  be  paid  for  from  the  indi- 
vidual or  accumulated  savings  of  the  public  and  it 
is  upon  the  facility  with  which  this  may  be  accom- 
plished that  the  success  of  the  operation  will  largely 
depend. 

These  methods  would  therefore  no  doubt  consti- 
tute a  direct  and  conservative  means  of  financing 
a  war  of  short  duration  and  might  in  all  probability 
prove  ample  for  that  purpose.  However  should  the 
war  be  prolonged  and  more  and  more  difficulty  be 


72    PASSING  OF  THE  GOLD  RESERVE 

encountered  in  disposing  of  the  successive  bond 
issues  to  the  public,  it  becomes  a  matter  of  interest 
to  consider  what  measures  have  been  taken  by  lead- 
ing nations  in  the  past  in  such  emergency  and  that 
then  presents  the  next  problem,  "  Inflation  of  the 
Currency." 


CHAPTER  XI 

INFLATION  OF  THE  CURRENCY 

Under  the  "  Gold  Reserve  Currency  Systems  ' 
of  the  present  day,  depending  so  largely  upon  the 
maintenance  of  a  fixed  gold  reserve,  we  find  that  it 
has  been  the  general  policy  of  most  nations  in  time 
of  war : 

First:  To  prohibit  the  export  of  gold. 

Second:  To  call  upon  all  citizens  of  their  respec- 
tive countries  to  turn  into  the  public  Treas- 
ury articles  of  gold  and  jewelry  that  can 
readily  be  spared  for  melting  in  the  public 
melting  pot,  in  order  that  the  available  gold 
supply  may  be  increased  to  that  extent,  and 
to  receive  in  payment  therefor  paper  cur- 
rency of  their  respective  countries. 

Third:  To  call  upon  all  the  citizens  of  their  respec- 
tive countries  to  turn  into  the  public  Treas- 
ury, or  to  other  duly  constituted  authority, 
foreign  securities  held  by  them  in  order  that 
they  may  be  disposed  of  abroad  for  gold  and 
to  receive  in  exchange,  or  payment,  there- 
for bonds  of  their  home  countries. 

Fourth:  To  regulate  foreign  commerce  and  the 
exchanges  so  as  to  guard  against  unfavorable 
balances  of  trade  and  to  avoid  the  necessity 
of  shipping  gold  abroad  in  settlement 
thereof. 

Fifth:  To  prohibit  the  dealing  in  gold  at  a  pre- 
mium. 

Sixth:  To  prohibit  the  setting  aside,  or  ear- 
marking, of  deposits  of  gold  due  to  domestic 
or  foreign  correspondents  and  to  force  such 

73 


74    PASSING  OF  THE  GOLD  KESERVE 

deposits  into  the  general  funds  of  the  banks, 
so  that  they  may  thereby  form  a  part  of  the 
gold  reserve  and  become  the  basis  for  the 
issue  of  currency  thereon,  whether  by  one  or 
more  institutions,  or  countries. 

Seventh:  To  suspend  the  operations  of  the  banking 
laws  of  the  country  requiring  the  redemp- 
tion of  legal  tender  bank  notes  in  gold  and 
to  authorize  the  further  issue  of  legal  tender 
bank  notes  without  requiring  the  mainte- 
nance of  a  gold  reserve  thereon. 

Eighth:  To  place  in  circulation  emergency  currency 
through  the  central  governmental  bank  on 
the  rediscount  of  notes  secured  by  the  deposit 
of  short-term  Treasury  notes  previously 
issued  by  the  Government  in  anticipation  of 
a  coming  issue  and  sale  of  Government 
bonds. 

Ninth:  To  place  in  circulation  emergency  currency 
through  the  central  governmental  bank  on 
the  rediscount  of  notes  secured  by  the  de- 
posit of  governmental  bonds  previously 
issued. 

Tenth:  To  place  in  circulation  emergency  currency 
through  the  central  governmental  bank  on 
the  rediscount  of  bills  of  exchange,  accep- 
tances, etc.,  not  growing  out  of  actual  com- 
mercial transactions  and  not  covered  by 
merchandise  actually  sold  and  in  course  of 
distribution  to  the  ultimate  consumer. 

Eleventh:  To  place  in  circulation  emergency  cur- 
rency through  the  central  governmental 
bank  on  the  rediscount  of  notes  secured  by 
the  deposit  of  stock  exchange  securities  and 
by  warehouse  certificates  covering  agricul- 
tural products,  such  as  cotton  and  the  like, 


INFLATION  OF  THE  CURRENCY      75 

stored   in   warehouse   awaiting   a   market, 
speculative,  or  otherwise. 

Twelfth:  Finally,  where  all  other  credits  fail  to  is- 
sue direct  from  the  Governmental  Treasury, 
or  through  the  central  bank,  legal  tender  cur- 
rency based  on  no  other  security  than  the 
ultimate  outcome  of  the  war  and  the  pros- 
pective revenues  that  may  thereafter  be 
derived. 

It  is  of  course  obvious  that  this  great  volume  of 
emergency  currency,  so  issued,  no  longer  bears  the 
quality  of  absolute  certainty  of  redemption  under- 
lying the  issue  of  legal  tender  Treasury  notes  and 
emergency  currency  provided  for  in  the  preceding 
chapters.  In  fact  by  a  departure  from  those  prin- 
ciples a  wide  field  of  uncertainty  and  inflation  of  the 
currency  is  entered  upon  and  if  carried  to  extreme 
limits  will  inevitably  result  in  a  depreciation  of  the 
currency  below  its  gold  standard,  as  is  conclusively 
shown  by  the  table  of  depreciation  of  European 
currencies  during  the  late  World  War  as  estimated 
by  the  Director  of  the  United  States  Mint.  (Treas- 
ury Decision  38231,  Jan.  I,  1920,  Chapter  VIII) 
and  by  the  falling  exchanges  of  the  present  day. 

These  are  necessarily  extreme  measures  and  it 
may  be  possible  that  even  the  best  of  governments 
may  be  compelled  to  resort  to  some,  or  all,  of  them 
when  driven  to  extremities  in  time  of  war.  That 
they  should  not  however  be  resorted  to  longer  than 
can  be  possibly  avoided  after  the  close  of  the  war 
is  self-evident  and  that  then  leads  us  to  the  con- 
sideration of  "The  Deflation  of  the  Currency  "  and 
"The  Passing  of  the  Gold  Reserve." 


CHAPTER  XII 

THE  DEFLATION  OF  THE  CURRENCY  AND  THE 
PASSING  OF  THE  GOLD  RESERVE 

A  prolonged  war  unavoidably  leaves  the  coun- 
tries involved  in  a  more  or  less  exhausted  condition 
and  the  recuperation  of  such  countries  will  also  be 
more  or  less  slow  depending  again  upon  the  degree 
of  exhaustion. 

If  the  exhaustion  is  complete  and  the  country  has 
been  driven  to  the  last  resort  of  issuing  legal  tender 
paper  currency  in  unlimited  quantities  without  im- 
mediate hope  of  redeeming  the  same  and  such  cur- 
rency has  become  depreciated  in  the  open  markets 
of  the  country  to  a  considerable  extent,  the  first  re- 
course will  of  course  be,  to  call  in  and  cancel  so 
much  of  such  currency  as  the  resources  of  the  coun- 
try will  permit,  by  exchanging  such  currency  for 
Governmental  interest  bearing  long  term  bonds, 
on  a  basis  of  valuation  for  the  currency  somewhere 
near  its  then  existing  depreciated  market  value,  and 
finally  where  such  depreciation  continues  to  near 
the  vanishing  point,  to  repudiate  the  currency  abso- 
lutely, as  was  done  by  the  Continental  Congress  of 
the  American  Colonies  after  the  close  of  the  Revo- 
lutionary War  of  1776-1783  when  "  on  the  31st 
day  of  May,  1781,  by  Act  of  Congress,  Continen- 
tal bills  ceased  to  circulate  as  money,  and  provision 
was  made  for  refunding  the  same,  but  they  were 
bought  for  speculation  thereafter  at  from  400  for 
1  up  to  1000  for  1  "  (A.  Barton  Hepburn,  History 
of  Currency  in  the  U.  S.),  and  again  by  France 
after  the  French  Revolution,  when  "  assignats  " 

76 


DEFLATION  OF  THE  CURRENCY   77 

issued  in  large  quantities  depreciated  rapidly  and 
finally  became  worthless. 

The  inflated  depreciated  legal  tender  currency 
having  been  thus  disposed  of  the  next  step  is  that  of 
placing  the  new  currency  system  of  the  country  on 
a  stronger  financial  basis ;  that  is  to  say,  to  provide 
a  currency  that  can  be  maintained  at  par  and  will 
form  a  sound  basis  for  the  commercial  and  financial 
transactions  of  the  nation. 

In  the  past  this  has  been  done,  or  attempted  to 
be  done,  by  getting  back  to  a  gold  reserve  basis  by 
providing  for  the  issue  of  a  new  national  legal  ten- 
der currency  secured  by  a  gold  reserve  of  30  or  40 
per  cent  of  its  volume,  either  through  the  National 
Treasury  direct,  or  through  a  Central  Governmen- 
tal Bank. 

Of  course  the  prime  and  essential  requirement  of 
this  proposition  is,  to  obtain  the  gold.  This  has 
usually  been  attempted  by  providing  for  the  issue 
and  sale  of  Governmental  gold  bonds,  principal  and 
interest  payable  in  gold,  and  offering  the  same  in 
home  and  foreign  markets  with  the  view  of  replen- 
ishing the  gold  reserve  with  gold  obtained  from 
those  sources.  However,  the  building  up  of  a  gold 
reserve  by  these  methods  is  a  slow  and  tedious  affair 
and  is  fraught  with  more  or  less  considerable  diffi- 
culties. In  the  first  place  there  may  be  no  available 
gold  supplies  left  in  the  home  country  and  the  pub- 
lic may  therefore  not  be  in  a  position  to  subscribe 
for  the  bonds,  however  willing,  and  in  the  second 
place,  the  home  country  may  have  already  ex- 
hausted its  foreign  credit  through  the  issue  of  pre- 
vious bonds  and  the  further  sale  of  Governmental 
bonds  in  foreign  markets  may  become  accordingly 
more  difficult  and  in  many  cases  possible  only  after 
the  allowance  of  ruinous  discounts,  the  payment  of 


78    PASSING  OF  THE  GOLD  EBSEEVE 

exorbitant  interest  charges  and  the  making  of  ex- 
traordinary commercial  concessions;  then  again 
in  the  third  place  a  prolonged  war  may  have  left  all 
the  leading  gold  producing,  or  gold  holding  nations 
in  a  more  or  less  equally  exhausted  condition  and 
none  will  have  any  available  gold  supplies  that  may 
be  loaned  to  the  other  through  the  purchase  of 
foreign  bonds.  In  fact  self-interest  may  compel 
them  all  to  hold  on  to  their  own  available  gold  sup- 
plies in  order  that  their  own  over-expanded  gold 
reserve  currency  systems  may  not  be  further  weak- 
ened. That  this  state  of  affairs  exists  in  many  of 
the  leading  countries  to-day  as  the  result  of  the 
"  World  War  "  is  well  known. 

Having  no  available  gold  supplies  of  their  own 
and  being  unable  to  obtain  such  supplies  from 
abroad  many  nations  to-day,  as  the  result  of  the 
"  World  War,"  no  doubt  find  themselves  in  a  posi- 
tion similar  to  that  surrounding  our  "  Modern 
country  "  outlined  in  Chapter  I  of  this  book.  To 
look  for  gold  is  therefore  a  hopeless  task.  Other 
means  of  beginning  anew  and  placing  the  country 
upon  a  sound  financial  and  commercial  basis  must 
therefore  be  resorted  to,  if  the  nations  are  to  survive 
and  prosper.  That  this  may  be  effectively  done 
although  the  nation  may  be  compelled  for  the  time 
being  to  live  more  or  less  within  itself,  has  been  fully 
and  clearly  demonstrated  in  the  earlier  chapters  of 
this  volume. 

In  order  that  this  end  may  be  accomplished  it 
becomes  essential  that  the  country  first  build  up  its 
commerce  and  industry  from  within  and  import 
from  abroad  as  little  as  possible,  at  least  not  in 
excess  of  what  can  be  paid  for  by  compensating 
exports  abroad,  so  that  the  balance  of  trade  will 
not  be  adverse  to  the  home  country.  If  this  is  ac- 


PASSING  OF  THE  GOLD  RESERVE    79 

complished  and  in  addition  to  a  Governmental  legal 
tender  currency,  based  on  ample  taxation,  a  check 
currency,  and  an  emergency  currency  are  also  pro- 
vided for  through  the  establishment  of  sound  bank- 
ing methods  as  outlined  in  Chapters  I  to  IV  there 
can  be  no  question  but  that  such  nation  will  recuper- 
ate rapidly,  although  it  may  have  no  gold. 

In  countries  where  the  exhaustion  is  not  so  com- 
plete and  where  there  has  been  no  recourse  to  the 
last  resort  of  issuing  legal  tender  paper  currency 
in  unlimited  quantities  without  immediate  hope 
of  redemption  and  where  the  inflation  of  the  cur- 
rency does  not  extend  beyond  an  inflation  of  the 
"  emergency  currency  "  of  the  country  through 
the  various  banking  methods  described  in  the  pre- 
ceding chapter,  resulting  in  an  over  issue  of  such 
emergency  currency  and  an  ever  dwindling  gold 
reserve,  the  remedy  is  closer  at  hand  and  the  de- 
flation may  be  proceeded  with  in  a  quiet  and  orderly 
manner  so  that  there  may  be  no  sudden  or  violent 
upheaval  of  the  commercial  and  financial  conditions 
existing  in  such  countries. 

This  should  be  accomplished  by  a  gradual  dis- 
continuance of  the  practice  of  issuing  "  Emergency 
Currency "  through  the  central  Governmental 
banking  institution  on  the  rediscount  of  notes  se- 
cured by  the  deposit  of  stock  exchange  securities  ; 
warehouse  certificates  of  all  kinds;  bills  of  ex- 
change, acceptances  and  the  like  not  growing  out  of 
actual  commercial  transactions  and  not  covered  by 
merchandise  actually  sold  and  in  course  of  dis- 
tribution to  the  ultimate  consumers;  Government 
bonds;  and  short  term  interest-bearing  Treasury 
notes  heretofore  mentioned. 

It  is  by  no  means  to  be  inferred,  that  by  this  proc- 
ess the  various  classes  of  securities  just  mentioned 


80    PASSING  OF  THE  GOLD  RESERVE 

are  to  lose  in  any  way  their  high  standing  in  the 
banking  community;  on  the  contrary  on  account  of 
their  extremely  liquid  nature  in  being  as  a  general 
rule  readily  convertible  into  cash  in  the  open  mar- 
kets, they  will  continue  to  form  banking  collateral 
of  the  highest  quality  and  as  such  form  the  basis  for 
the  issue  of  a  "  Bank  Check  Currency"  to  such  an 
extent  and  in  such  volume,  as  the  banking  usages, 
or  the  laws  of  the  particular  country  may  permit,  as 
was  fully  set  out  in  Chapter  III  of  this  book. 

In  fact  what  is  sought  to  be  accomplished  and 
what  will  be  accomplished  by  this  process  is  merely 
a  deflation  of  the  over-expanded  emergency  cur- 
rency. That  this  deflation  will  of  necessity  react 
somewhat  upon  the  commercial  banking  system  of 
the  country  in  that  it  will  require  the  drawing  in  of 
banking  credits  extended  on  such  classes  of  securi- 
ties, in  order  that  a  safe  and  proper  ratio  of  bank 
reserves  to  bank  deposits  may  be  maintained,  can- 
not be  doubted.  This  will  however  necessarily  be- 
come a  private  banking  problem  and  cannot  further 
affect  the  stability  of  the  national  currency ;  bearing 
in  mind  also  that  the  Governmental  central  bank 
remains  and  is  open  for  the  further  issue  of ' i  Emer- 
gency Currency  '  based  on  commercial  bills  of 
exchange  of  high  quality  covering  goods  actually 
moving  in  commerce;  thus  affording  every  oppor- 
tunity for  legitimate  commerce  to  "  Finance  "  it- 
self at  all  times. 

We  have  thus  demonstrated  that  a  country  totally 
exhausted  by  the  War,  without  credit  abroad  and 
without  gold  at  home,  is  as  a  matter  of  necessity 
compelled  to  begin  anew  by  establishing  industry 
and  credit  at  home  on  a  full  legal  tender  Govern- 
mental currency  basis,  not  supported  by  a  "  Gold 
Reserve." 


DEFLATION  OF  THE  CURRENCY   81 

As  to  countries  not  totally  exhausted  by  the  war, 
having  issued  large  volumes  of  inflated  emergency 
currency,  supported  by  an  ever  dwindling  gold  re- 
serve, we  will  observe  if  we  look  about  to-day  that 
the  general  tendency  is  to  restrict,  or  to  absolutely 
prohibit  the  exportation  of  gold  for  fear  of  further 
reducing  the  ratio  of  the  gold  reserve  supporting 
the  emergency  currency  outstanding.  This,  as  is 
well  known,  is  the  primary  cause  of  the  falling  ex- 
changes of  European  currencies  to-day. 

As  was  demonstrated  in  Chapter  VIII  of  this 
work  a  long  continued  falling  exchange  and  an  ad- 
verse balance  of  trade  can  result  only  in  making  the 
country  so  affected  poorer  and  poorer  in  that  it 
compels  it  continually  to  pay  higher  prices  for  mer- 
chandise imported  and  to  receive  lower  prices  for 
home  products  exported,  as  measured  in  gold.  The 
question  of  the  hour  is  therefore,  how  can  this  fall- 
ing exchange  be  remedied  f 

We  have  just  observed  that  an  emergency  cur- 
rency over-inflated  through  the  issue  of  such  cur- 
rency on  the  rediscount  of  notes  secured  by  the 
deposit  of  stock  exchange  securities;  warehouse 
certificates ;  and  bills  of  exchange  and  acceptances 
not  growing  out  of  actual  commercial  transactions 
may  be  deflated  by  discontinuing  the  issue  of  the 
emergency  currency  on  such  collateral  security 
and  the  burden  will  fall  upon  the  banking  and  com- 
mercial interests  of  the  country,  which  must  adjust 
themselves  accordingly.  When  it  comes  to  deflating 
the  emergency  currency  however  by  discontinuing 
the  practice  of  issuing  such  currency  on  the  deposit 
of  Governmental  bonds  and  short  term  Treasury 
notes  an  entirely  different  state  of  affairs  arises  in 
that  such  action  will  result  in  throwing  large  quan- 


82    PASSING  OF  THE  GOLD  RESERVE 

titles  of  such  bonds  and  short  term  notes  on  the 
market,  causing  undoubtedly  a  fall  in  the  market 
prices  thereof  below  par  and  a  weakening  of  the 
Government  credit  to  that  extent.  The  natural 
remedy  in  such  cases  would  therefore  be  to  deflate 
the  currency  by  converting  a  considerable  volume 
thereof  into  Government  interest  bearing  gold 
bonds  which  of  course  becomes  difficult  as  the  home 
gold  supplies  are  already  tied  up  in  the  existing 
gold  reserve  of  the  country  and  the  impossibility 
of  obtaining  further  supplies  of  gold  through  the 
sale  of  bonds  abroad. 

In  view  of  these  circumstances,  we  already  hear 
it  openly  discussed  in  European  countries  as  to 
whether  after  all  it  would  not  be  advisable  to  cut 
the  "  Gordian  knot  "  by  withdrawing  the  embargo 
on  the  export  of  gold  entirely  and  to  let  that  go 
where  it  will,  in  the  ordinary  course  of  settlement 
for  adverse  balances  of  trade.  That  such  course 
would  immediately  remedy  the  adverse  falling  ex- 
changes of  the  country  and  restore  them  to  par  can- 
not be  doubted. 

If  this  is  done  and  if  we  bear  in  mind  that  most 
European  countries  as  a  result  of  the  "  World 
War  "  are  no  longer  in  fact  on  a  gold  reserve  basis 
in  that  the  legal  tender  Governmental  bank  notes  of 
those  countries,  although  a  full  legal  tender,  are  no 
longer  redeemable  in  gold  at  the  option  of  the 
holder  at  home,  and  are  only  reluctantly  convertible 
into  gold  for  export  abroad,  we  will  begin  to  realize, 
that  the  " Passing  of  the  Gold  Reserve"  is  closer 
at  hand. 

If  they  will  now  readjust  their  home  affairs  by 
providing  for  ample  taxation  to  defray  the  daily 
running  expenses  of  the  government  and  include 


PASSING  OP  THE  GOLD  RESERVE    83 

therein  a  sinking  fund  for  the  curtailment  of  the 
governmental  bonded  debt ;  provide  for  and  issue  a 
governmental  Treasury  legal  tender  currency  not 
to  exceed  the  amount  repayable  to  the  Treasury  as 
taxes  for  the  ensuing  year ;  provide  for  and  foster 
in  every  way  the  establishment  of  a  sound  commer- 
cial banking  system  that  will  at  all  times  have  the 
confidence  of  the  public  so  as  to  assure  ample  de- 
posits to  form  a  "  banking  reserve  "  for  the  issue 
thereon  of  a  "  bank  check  currency  ";  provide  for 
the  issue  of  an  "  Emergency  Currency  "  in  times  of 
peace  on  the  rediscount  only  of  bills  of  exchange  of 
the  highest  commercial  quality  as  heretofore  out- 
lined; and  provide  for  a  "  Gold  Fund  "  available 
only  for  use  in  the  arts  at  home  and  for  settlement 
of  adverse  balances  of  trade  abroad,  a  long  step  for- 
ward will  have  been  taken  towards  an  early  recuper- 
ation from  the  disastrous  effects  of  this  greatest  of 
"  World  Wars  "  and  the  gold  reserve  and  the  sys- 
tem of  currency  based  thereon  will  have  become  a 
thing  of  the  past. 

Should  this  course  be  pursued  it  may  follow  that 
the  gold  reserve  may  largely  if  not  entirely  leave  the 
country  in  settlement  of  adverse  balances  of  trade 
abroad  and  the  question  then  naturally  arises  would 
not  the  foreign  exchanges  again  fall  to  a  consider- 
able extent,  or  to  wiiere  they  were  before  the  em- 
bargo was  lifted.  The  anwer  to  that  is,  that  as  long 
as  the  country  is  buying  goods  from  abroad  in  ex- 
cess of  what  can  be  paid  for  by  exports  from  the 
home  country,  the  exchanges  may  again  be  un- 
favorable. This  should  not  however  affect  the  feasi- 
bility of  this  course,  for  if  we  bear  in  mind  that  the 
quickest  way  to  restore  credit  abroad  is  to  pay  ad- 
verse balances  of  trade  in  gold  when  that  is  avail- 


84    PASSING  OF  THE  GOLD  KESEKVE 

able,  and  as  the  gold  reserve  is  no  longer  available 
for  the  redemption  of  either  legal  tender  or  emer- 
gency currency  at  home  it  is  obvious  that  no  useful 
purpose  can  be  served  in  longer  refusing  to  let  it 
go  abroad  where  it  will. 

While  this  no  doubt  will  have  a  direct  tendency 
towards  remedying  the  adverse  falling  exchanges 
of  the  home  country  a  far  greater  benefit  will  be  con- 
ferred upon  the  internal  industry  and  commerce  of 
such  country  in  that  it  removes  entirely  the  ever 
present  menace  of  a  curtailment,  or  disturbance  of 
home  industry  and  commerce,  through  the  ever 
rising  and  falling  of  the  volume  of  the  gold  reserve 
and  the  resultant  violent  expansion  and  contraction 
of  banking  credit  based  thereon. 

As  a  sound  and  stable  commercial  banking  sys- 
tem is  the  greatest  promoter  of  modern  industry 
and  commerce  everything  possible  should  be  done 
to  strengthen  and  support  that  system,  for  it  is  by 
this  method  only  that  domestic  industry  and  com- 
merce can  be  restored.  There  is  no  other  way. 
When  this  is  done  foreign  commerce  and  the  bal- 
ances of  trade  will  adjust  themselves  accordingly. 

While  we  have  thus  far  in  pursuing  our  studies 
developed  certain  well  defined  principles  as  under- 
lying the  currency  system  of  the  future  for  all  coun- 
tries, it  may  be  of  interest  in  closing  to  apply  those 
principles  to  the  conditions  as  they  exist  in  our  own 
country  to-day,  in  order  that  we  may  apply  a  prac- 
tical test.  We  find  according  to  the  "  Daily  State- 
ment of  the  United  States  Treasury  "  of  February 
28, 1920,  the  following  state  of  facts : 


DEFLATION  OF  THE  CURRENCY   85 

PAPER  CURRENCY  ISSUED  SECURED  BY 

U.  S.  Gold  Certificates,  Gold  in  Treasury, 

$619,952,254.00  $619,952,254.00 

U.  S.  Legal  Tender  Notes, 


$346,681,016.00 
U.  S.  Treasury  Notes, 

(1890)    $1,686,292.00 

U.  S.  Silver  Certificates, 


Gold  Reserve  in  Treasury, 

$152,979,025.63 

Silver  Dollars  in  Treasury, 


$128,571,523.00  $128,571,523.00 

Federal  Reserve  Notes  se- 
cured by  Government 
War  Obligations  (Short 
Term  Notes  &  Bonds), 

$1,572,980,000.00 
Federal    Reserve    Bank 
Notes  secured  by  Gov- 
ernment Bonds, 

$237,834,400.00 
National  Bank  Notes  se- 
cured by  U.  S.  Bonds, 

$722,641,255.00  

Total.. $3,630,346,740.00  Total    ...$901,502,802.63 

According  to  the  annual  report  of  the  Secretary 
of  the  Treasury  for  the  fiscal  year  ended  June  30, 
1919,  the  estimated  revenues  for  the  fiscal  year  end- 
ing June  30, 1920,  are  as  follows : 

Internal  Revenue    $4,940,000,000 

Customs    260,000,000 

Sale  of  Public  Lands 3,000,000 

Miscellaneous   300,000,000 

Total    $5,503,000,000 

Comparing  the  estimated  yearly  revenue  with 
the  amount  of  paper  currency  outstanding  we  find 
that  the  amount  of  such  currency  is  well  below  the 
estimated  receipts  and  certainty  of  redemption  is 
therefore  assured.  We  may  now  authorize  the 
Secretary  of  the  Treasury  to  call  in : 

First:    National  Bank  Notes  secured  by  U.  S. 

Bonds   $722,641,255 

Second:  Federal  Reserve  Bank  Notes  secured  by 

m  U.  S.  Bonds 237,834,000 

Third:    Federal  Reserve  Notes  secured  by  Gov- 
ernment  War    Obligations,    Short    Term 

Notes  and  Bonds 1,572,980,000 

Total    $2,533,455,655 


86    PASSING  OP  THE  GOLD  RESERVE 

and  to  issue  therefor  United  States  Legal  Tender 
Treasury  Notes  to  the  full  face  value  thereof,  retir- 
ing the  bonds  and  short  term  notes  as  the  National 
Bank  and  Federal  Reserve  Notes  are  canceled. 

This  being  done  we  may  then  authorize  the  Secre- 
tary of  the  Treasury  to  call  in  : 

Fourth:    U.    S.    Silver   Certificates   secured  by 

Silver  Dollars  in  the  U.  S.  Treasury  .......     $128,571,523 

Fifth:    U.   S.  Legal  Tender  Notes  and  U.   S." 

Treasury  Notes  (1890)  secured  by  Gold  Re 

serve  in  the  Treasury  $152,979,025.63 
Sixth:  U.  S.  Gold  Certificates  secured  by  Gold  in 

the  Treasury  to  full  face  value  thereof  .....       619,952,254 


."") 

-  ^ 

J 


Total    ............................  $1,096,891,085 

and  to  issue  therefor  United  States  Legal  Ten- 
der Treasury  Notes  to  the  full  face  value  thereof, 
canceling  the  silver  certificates  ;  U.  S.  Legal  Ten- 
der Notes;  U.  S.  Treasury  Notes  (1890)  and 
U.  S.  Gold  Certificates  as  they  are  paid  into  the 
Treasury  and  transfer  the  gold  held  in  the 

Treasurv  f$619,952,254.00 

iry  ......................  i  152,979,025.63 

and  the  silver  dollars  ...........     128,571,523.00 


Total    $901,502,802.63 

into  the  "  Treasury  Gold  Fund  "  to  be  there  held 
available  for  export  abroad  in  payment  of  adverse 
balances  of  trade,  or  for  use  in  the  arts  at  home,  as 
previously  outlined. 

If  Congress  will  then  discontinue  the  free  coinage 
of  gold  and  authorize  the  issue  in  payment  there- 
for of  full  Legal  Tender  Treasury  Notes  of  the 
existing  gold  standard  value;  placing  the  gold  so 
obtained  in  the  "  Gold  Fund  "  and  made  available 
for  export  abroad  in  payment  for  adverse  balances 


PASSING  OF  THE  GOLD  RESERVE    87 

of  trade;  repeal  so  much  of  the  " National  Bank 
Act  "  and  the  the  amendments  thereto;  and  of  the 
existing  " Federal  Reserve  Act"  as  are  in  conflict 
with  this  plan,  the  reorganization  of  the  United 
States  currency  upon  a  sound  and  uniform  basis 
will  have  been  accomplished  and  the  "  Gold  Re- 
serve," will  have  in  fact  become  a  thing  of  the  past. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


APfi    I41S36 

*iA>*  20  1948 

"' 

^my<r~i  \   f"5 

. 

LD  21-100m-7,'33 

XC  93521 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


